In most jurisdictions, the sale of a capital asset is subject to capital gains tax law, while the sale of trading assets are subject to revenue laws. This distinction is a very important one as the way that revenue and capital items are taxed is very different in Singapore.

Capital Gains Tax in Singapore

There is no capital gains tax regime in Singapore.

This means that if you sell assets that are capital in nature there is no tax consequence from this sale, regardless of whether you make a profit or a loss on the sale.

Therefore, typically the sale of passive investments, such as real estate and share portfolios, are sold without any tax implications in Singapore. 

However, it is important to understand when assets may actually be considered trading assets as these assets would be covered by revenue laws instead. Where such assets are covered by revenue laws, their disposal will attract income tax consequences.

Assets Used as a Trading Asset

In Singapore there are rules that indicate an asset is a trading asset rather than a capital asset. These rules help ensure that a business doesn’t take advantage of the lack of capital gains tax by purchasing an asset with the express intent to turn this asset over for a profit instead of holding it as a long term, capital appreciating asset.

There are five specific factors, colloquially known as “badges of trade”,  that are considered in determining whether an asset might be a trade item. These are the holding period, frequency of sale, purpose of transaction, extent of enhancement work, and reason for the sale.

Holding Period

A short term holding period indicates that the asset was more likely purchased for profit-seeking activities. In general, capital assets must be held and used for their purpose for a minimum of two years in order to be considered capital in nature. Assets sold within two years of purchase are typically treated as revenue assets, unless there was a specific reason for the sale that caused the asset to be sold within two years.

Frequency

If you frequently purchase and sell the assets in question, this indicates you are trading these assets, rather than purchasing them for use in a going concern. This can include significant assets such as property, shares, and other investments. Where your business frequently purchases and then sells real estate, the Inland Revenue Authority of Singapore will presume that you are in the business of trading real estate, rather than owning these assets for long term capital growth.

Purpose of Transaction

When an asset is not used for its intended purpose, this indicates that the asset was not actually purchased to be used as an asset.

A simple example would be purchasing a warehouse. If you leave the warehouse unused and vacant, then it has not actually been used for the purpose of a warehouse. Consequently, the sale of the warehouse is more likely to be a profit-generating motive. Conversely if the warehouse was purchased and used as a warehouse it is more likely to be an asset use motive.

Extent of Enhancement Work

When an asset is purchased, then significant resources are spent enhancing or renovating it prior to selling it, this would indicate the reason for the purchase was a profit motive. If an asset is purchased and renovated to be fit for specific use as a business asset, rather than for resale value, then this would more likely indicate an asset use motive.

Reason for Sale

The reason for selling the asset is also considered. If an asset is sold with a profit-making motive, it is more likely to be considered a trading asset. However if it is sold after being used for its intended purchase as an asset then it would be exempt from tax as a capital asset.

This factor is an important one. Even if a property is sold within two years, there could be a specific reason that indicates the property was still a capital asset. For instance, the sale may have been required due to liquidating the business, government acquisition, or other closure or reduction of business operations. In such situations, the sale would still likely be a capital gain because the underlying reason for the sale was not profit-generation.

Summary of Capital vs Trading Assets

The facts of the way an asset is used and the motivations for purchasing the asset determine if the asset is capital or revenue in nature. When an asset is purchased and used for a profit-motivation rather than an asset use motive, it is treated as a trading asset, or revenue in nature, rather than as a capital asset under capital gains rules.

The table below outlines the likely scenarios of how an asset could be classified. 

	Likely Capital	Likely Trading
Holding Period	Over two years	Less than two years
Frequency	Low frequency	High frequency
Purpose of Transaction	To use as an investment or business asset	Profit-generation
Extent of Enhancement Work	Little renovations or work focused on adjusting asset for business use	High investment in enhancement or renovation to increase profit on sale
Reason for Sale	End of use, divest investment or liquidating business	To generate profits

Goods and Services Tax (GST) is a broad tax levied on the consumption of most goods and services that are sold in Singapore. Many countries have a similar, or even identical, tax as Singapore’s GST, although it may be known as a Value-Added Tax (VAT) in some countries. The Inland Revenue Authority of Singapore (IRAS) governs the application of GST and requires all GST registered businesses to file GST returns with them.

GST is only levied on goods and services that are sold within Singapore. This includes imported goods. However, exported supplies and services provided overseas do not attract GST.

The Rate of GST

The current GST rate (in 2023) is 8%. This is being increased to 9% from January 2024.

In simple terms this means if the cost of a product is $100 then the consumer would actually pay $108 including GST.

What Goods and Services GST Applies to

GST applies to most goods and services sold in Singapore, however there are some exemptions.

The exemptions include most financial services, the sale and lease of residential property, and the importation and local supply of investment-orientated precious metals.

How GST is Charged and Remitted

The business selling goods or services is responsible for both the collection of GST from customers and remittance of the GST to IRAS.

GST registered businesses are required to track their sales and the amount of GST they collect through their regular record keeping. This information is then reported to IRAS through the lodgement of a GST return. GST returns are lodged with IRAS on either a monthly or quarterly basis.

The GST that a business collects is known as output tax.

Conversely, the GST that a business pays in the course of making business purchases is known as input tax.

Lodgement of a GST Return

When a GST return is lodged, the business reports the total output tax collected and claims a credit for all the input tax that they have paid. The net amount of GST that the business pays is the total amount of GST that the business must remit to IRAS.

In the event that the business pays more input tax than they collect in output taxes, IRAS will owe the business a refund.

Businesses who fail to lodge their GST return on time are subject to a 5% late lodgement penalty. IRAS will also issue a demand notice for the outstanding payment. If the company fails to pay after 60 days from the date of their demand notice, future penalties of 2% each month may be applied. The maximum penalty for late GST payments is capped at 55%.

Evasion of tax payments can result in fines and imprisonment.

Who Needs to Register for GST

All businesses with an annual turnover in excess of SG$1million are required to register for GST. Any business with a lower turnover can voluntarily register.

This turnover threshold only applies to businesses who are not GST exempt. Exempt businesses are businesses that deal with goods or services that are exempt from GST. This includes businesses that provide financial services, sell or lease residential property, or import and supply investment-orientated precious metals. To be given a registration exemption from IRAS, at least 90% of the company’s total revenue must be GST exempt and the net balance of GST collected must be negative (otherwise resulting in a refund).

Once a business is registered for GST they are required to remain registered for a minimum of two years.

If a company decides to voluntarily register for GST the company director(s) must complete e-Learning courses in “Registering for GST” and “Overview of GST”. They are exempt from needing to complete these courses if they have already completed these courses within the past two years, or they have experience managing another GST registered business, or have their GST returns prepared by an individual who is an Accredited Tax Adviser (ATA) or Accredited Tax Practitioner (ATP).

IRAS can also impose additional conditions for GST registration and compliance. When a company fails to meet these requirements, IRAS may cancel the company’s GST registration.

How to Register for GST

A company can register for GST online through their myTax Portal or they can post a paper application to IRAS. Alternatively, they can engage a designated filing agent to submit the application on their behalf.

The company cannot charge GST until they have received approval from IRAS.

Once registration is approved, IRAS will send a letter that includes the company’s GST registration number and the effective date of GST registration.

The effective date of GST registration is the date that the business must commence charging and collecting GST from.

What Happens When you Fail to Register for GST on Time

To understand what happens if you fail to register for GST on time we present this real life case study. Names and specific identification have been hidden or changed for anonymity.

The case:

An Australian company incorporated a company in Singapore to act as the local contracting party for services to be provided in Singapore.

As an Australian company, they were familiar with the Australian approach to GST registration. This differs from the Singapore requirements in that, in Australia, GST registration can be backdated and it can be made on a voluntary basis without additional requirements.

The threshold for GST registration in Australia is AU$75,000 and only applies to GST taxable goods and services. In both countries GST registration is considered voluntary registration when the annual turnover is below the relevant threshold.

Unlike Australian registration, voluntary registration in Singapore needs to be approved. In some cases, approval for voluntary registration needs to be accompanied by a bank guarantee for future payments of GST to IRAS. 

The Singapore company, in our case, proceeded to provide services with GST included in the price. However, they did this without formally registering for GST in Singapore.

In Singapore this is regarded as a severe contravention of the GST laws. This is because GST registration must be approved and the commencement date confirmed, prior to the business charging GST.

The company attempted to backdate the registration, which is not permitted in Singapore.

IRAS consequently imposed fines and potential action against the directors.

Summary of GST Registration Requirements in Singapore

In summary, it is important to be aware of the requirement to register for GST.

If you intend to register on a voluntary basis, understand that this is not automatic, and you need to meet the required conditions and be approved for registration. Otherwise, you must keep an eye on your quarterly turnover and register as soon as your projected turnover will hit the required turnover threshold.

GST applies to most goods and services sold in Singapore, with exemptions for financial services, residential property and importing of investment-oriented precious metals.

Once you receive your registration letter from IRAS, you can commence charging GST from the date indicated as your registration date.

Failure to follow the requirements for GST registration can result in fines and other penalties for all Directors of the Singapore company. 

A Singapore Company is governed by the Singapore Companies Act. which is administered by the Accounting & Corporate Regulatory Authority (ACRA). There are 5 essentials that need to be covered when starting a company in Singapore. These five essentials include having a resident Director, a shareholder, a Secretary, a Singapore business address and at least $1 in capital.

To be a tax resident Singapore Company your company must be managed and controlled in Singapore. This generally means that meetings of the Board of Directors of the company must be undertaken in Singapore. 

Getting these company registration requirements right will assist in ensuring that your company is appropriately set up in Singapore.

1: The Requirement to have a Resident Director

Under the Singapore Company Act all Singapore companies are required to have at least one resident director. Without a resident director, a company will be contravening the Companies Act and risks being deregistered.

An individual is an ordinary resident of Singapore if they are a Singapore Citizen, a Singapore Permanent Resident, or an Employment Pass or EntrePass holder. This means that the individual is legally able to live and work in Singapore and have a residence in Singapore. 

It is important to note that individuals on working visas can only be appointed to the company which is sponsoring their permit.  

If you are planning to incorporate a company in Singapore but you do not have any resident individuals to be a director then you do have the option of nominating a resident director (usually a professional who is paid to fulfil the requirement).

2: The Requirement to have a Shareholder

All Singapore companies are required to have at least one shareholder. Shareholdings designate who owns the company, as well as who has the various rights, privileges, and responsibilities within the company.

Shareholders are required to participate in the Annual General Meeting and any Extraordinary General Meetings of the company, where the management decisions for the company are made.

There is no specific requirement that shareholders be Singapore residents. However, where a shareholder is not a Singapore resident, such shareholders will be subject to their local taxation laws on the receipt of income distributed to them from the Singapore company.

3: The Requirement for a Secretary

The Singapore Companies Act requires every company to appoint a Company Secretary. This Secretary is the individual who is responsible for ensuring that the company complies with the relevant legislations and regulations, as well as keeping Board Members informed of their legal responsibilities.

Your Secretary must be an individual who is a resident living in Singapore. As a position regulated by ACRA, they must also have the experience, academic, and professional qualifications necessary to fulfill their role. These individuals are usually lawyers, accountants or chartered secretaries.  

If you are a sole director of a company, you are not able to act as company secretary – you will need to appoint another person to act as Company Secretary.

While not a legal requirement, it is recommended that you engage a corporate service provider to act as your Company Secretary.  Such professionals are known as Registered Filing Agents and are regulated and approved by ACRA to act in such a position. 

4: The Requirement for a Singapore Address

It is mandatory for all Singapore companies to have a local registered office in Singapore. This address is required from the point of incorporation.

The address must be a physical address (not a PO Box) and must be the address where all communications and notifications are sent. The address must also follow certain requirements regarding being an address that is open and accessible to the public for a least 3 hours during each business day.

If your business is run from a home base or you have yet to set up a public office, then you have the option of using a corporate service provider as your company’s registered address.

5: The Requirement for at Least $1 SGD in Shareholder Capital

Share capital is the money that the shareholders have invested into the company. This share capital must be maintained for the life of the company. At the time of incorporation, a minimum of $1 in capital must be paid.

While shares can technically be issued in any currency, for convenience Singapore dollars are preferred.

A key consideration in determining the level of share capital for a company is understanding that it is customary in commercial practice to expect a company to have a high level of share capital.  For example, when applying for a commercial lease, the prospective landlord is likely to request that the capital in the company be sufficient to cover the annual rental commitment.  

Similarly, if your company is sponsoring an individual for a working visa, the Ministry of Manpower is likely to request that the share capital of the company is equal to the annual salary of the employee applying for a working visa. 

Corporate Tax Residency for Singapore Companies

It is important to note that the mere fact that a company is incorporated in Singapore does not mean that the company is automatically a tax resident. In Singapore the tax residency of a company is determined by where the business of the company is controlled and managed.

The concept of control and management for a company does not mean where the day-to-day operations of the company are carried on – thus the location of the trading activities and physical operations are not considered. Rather, the concept of control and management is considered from a corporate governance perspective.

In Singapore, it is generally accepted that if a company holds its board of directors meetings in Singapore, it will be considered that control and management is being undertaken in Singapore – making the company a tax resident for the Year of Assessment.

It is important to note that Singapore corporate residence for tax purposes is determined by examining the facts as they stand in the Year of Assessment. Corporate residency in Singapore can change each year.

Notwithstanding the definition in the Act, the Inland Revenue Authority of Singapore (“IRAS”) in practice shall examine the preceding Year of Assessment to determine corporate residency.

Corporate residency is important as only Singapore resident companies will be able to obtain a Certificate of Residency from IRAS and therefore, apply any provisions of double tax agreements between Singapore and another jurisdiction. 

Starting a Company In Singapore

While there are a number of requirements involved in the establishment and running of a company in Singapore, the above five requirements cover the basic essentials needed to incorporate the company.

A trusted advisor like CST, will ensure that you have all your bases covered when you set up your Singapore company. We can act as your registered company address, provide Corporate Secretarial services, provide a nominee Director, and even assist with setting up a Singapore bank account. 

With our company incorporation services provided free when you sign up to one of our tax and accounting service packages, now is the time to contact us to discuss your company needs. 

Singapore is often chosen as a regional business hub for Australian companies looking to expand into Asia or beyond. This is largely because Singapore is one of the countries where there are limited restrictions on foreign businesses setting up. Accordingly it is possible for a fully Australian owned company to operate a business in Singapore. 

This blog considers the potential tax implications of running a business in Singapore through an Australian resident company.

What is an Australian Resident Company?

A company may be an Australian company due to one of three possibilities: 

• Incorporation in Australia
• Central management and control being exercised from Australia, or 
• Voting power is controlled by shareholders who are Australian residents.

This means that even if the decision is made to incorporate a company in Singapore to oversee the business, the company may still be considered an Australian company if the business is managed in Australia, or if the controlling shareholders are Australian residents.

Singapore Company

A company is considered a Singapore tax resident when the control and management of the company is in Singapore. This means that even if a company is incorporated in Singapore, if it is controlled and managed in Australia, then the company will simply be an Australian resident company. 

However, if the company is incorporated in Australia but controlled and managed in Singapore then both Australia and Singapore will consider the company to be a resident company. When this situation occurs the company will need to consider the double tax agreement between Australia and Singapore.

For the purposes of this blog we are looking at a company that is an Australian resident company operating a business in Singapore through a subsidiary incorporated in Singapore.

Australian Taxes

An Australian resident company is subject to Australian taxes on income from worldwide sources. This means that all business income and any capital gains, will need to be reported in an annual income tax return.

Singapore Taxes

If the company is not a resident company in Singapore but it operates a business in Singapore  then the company is usually only taxed on the Singapore-sourced income that is generated through the business. 

The Singapore company tax rate is a flat 17%, but many concessions can apply to reduce the effective tax rate. 

The company may also be required to register for GST in Singapore. Other local taxes may also be payable. 

Double-Taxation

Under the double-taxation agreement between Australia and Singapore an Australian resident company only has to pay taxes in Australia. However, where the Australian company runs a business in Singapore through a permanent establishment in Singapore then Singapore has taxation rights over the profits generated through this permanent establishment.  

As a business operating in Singapore the company will be required to pay income tax on such business income at a rate of 17%. 

When the income is reported in the Australian tax return the company will be eligible to claim the foreign tax paid as a credit against the Australian tax assessment. This ensures that the company will only be paying taxes at the higher Australian tax rate. 

When you decide to expand your business into Singapore it is important to ensure that you get your structuring right, and that you understand the full tax implications of your various options. There are a range of questions that need to be addressed including profit repatriation to Australia, withholding tax, transfer pricing, debt/equity and foreign currency issues. 

Make sure that you speak to an experienced international tax expert before making your move. 

As an Australian moving to Singapore there are a number of differences that you should be aware of in relation to taxation.

Having an idea of what to expect will help you to organise your move and understand your tax position so that you are more financially prepared.

You can download our guide: Moving to Singapore, here.

Taxation Basics

The most fundamental difference between Australia and Singapore is that in Singapore there is no CGT in Singapore and they do not generally tax investment income. Singapore also has a much lower rate of tax in their highest tax tier, which is one of the appeals for Australians considering a move to Singapore on a permanent basis.

Other key differences between Australia and Singapore’s taxation system include: 

• Financial year
• Terminology used
• What constitutes allowable deductions
• Which income is taxed
• How tax is paid. 

For instance, while you are taxed on your worldwide income as an Australian resident, Singapore only taxes residents on income that is actually sourced in Singapore. Read on to see some of the basic differences in taxation from an employment perspective.

	AUSTRALIA	SINGAPORE
Financial Year	1 July to 30 June	1 January to 31 December
Taxation Body	Australian Taxation Office: ATO	Inland Revenue Authority of Singapore: IRAS
Individual Tax Rate	Progessive rate from 0% to 45% for incomes exceeding AUD$180,000.Non residents are taxed a minimum of 15% and up to 45%.	Progressive rate from 0% to 22% for incomes exceeding SGD$320,000. Non residents are taxed between 15% and 22%.
Taxed on	Taxable Income that is calculated by taking in your worldwide income less allowable tax deductions.	“Chargeable” Income that is sourced in Singapore.

Employment Taxation

As an Australian employee you would be familiar with the PAYGW system.

Pay As You Go Withholding ensures that your estimated tax is paid directly to the ATO through the year. Then, at the end of the year, you lodge your tax return and are either required to pay any additional tax owed, or are refunded any excess tax that the ATO received through the year.

Singapore is the opposite. All of your wages will be paid to you in full as an individual. Then you are required to pay your income taxes in full at the end of the tax year. This means you need to be careful to track and keep aside money to pay your tax bill. In your second year as a resident of Singapore you can pay your tax for the first year using a monthly instalment system.

You will also be used to working in a system where you can claim work related deductions to help bring your tax obligations down. In Australia any work expenses that your employer does not cover can be paid for yourself, then claimed as a deduction that reduces your taxable income. Singapore does not allow employees to claim tax deductions. This means you will want to be extra sure that your employer is covering your work related costs.

Another system you will be familiar with as an Australian worker is Superannuation. Your Australian employer is required to make superannuation contributions to your superannuation fund in order to fund your eventual retirement. The accrued superannuation balance is only able to release your superannuation to you in limited situations, such as retirement.

Singapore also has a retirement fund, the Central Provident Fund (CPF). However, this fund does not just serve as a retirement cash payout. Instead, it is intended to help save for housing and healthcare in retirement. Unfortunately for Australian expats, the CPF is not typically available. This means you may need to continue to build an Australian superannuation fund to plan for your own retirement.

	AUSTRALIA	SINGAPORE
Tax on Wages	Managed through the PAYGW system where tax is withheld by your employer and you typically receive a small refund/have a small payable to adjust the total tax required for your actual income over the year.	You are paid your total wage income. When you lodge your tax return you are required to pay your income tax obligations in full at that time.
Work Deductions	You can claim deductions as an employee.	You cannot claim deductions as an employee to bring your taxable income down.
Super Funds	Employees have Superannuation Guarantee payments paid into their personal super fund at 9.5% of their wages, with capped limits. All employees over 18 and earning more than $450 a month are paid superannuation.  Temporary residents or visitors who depart Australia can have their Australian Superannuation paid out or rolled into an overseas fund. If this isn’t organised within 6 months their superannuation money will be transferred to the ATO as unclaimed super money.	Singaporeans and permanent residents are covered by a Central Provident Fund (CPF) that helps provide for retirement, including housing and healthcare. While individuals contribute to their own fund, employers contribute 17% of wages paid, loved ones typically contribute, and the government also provides top-ups and incentives.    Only Singaporeans are eligible for the CPF. This means Australian expats may need to maintain a local Australian super fund instead, bearing in mind that contributions could be subject to tax in Singapore.

Other Taxation Matters

Employment income is not the only source of income. While Australians are taxed on a range of income types, the Singapore tax regime is not the same.

Capital Gains Tax

Australians are required to pay tax on the sale of most capital assets, and in some situations they are even taxed on the deemed realisation of assets. Certain concessions, such as the 50% discount where the asset has been held for more than 12 months, can be applied. Singapore does not have a capital gains tax regime at all.

Goods and Services Tax (GST)

GST is a tax that applies in both Australia and Singapore on the sale of goods and services. GST is 7% in Singapore, whereas it is 10% in Australia. However, this doesn’t necessarily mean you end up paying less GST in Singapore overall. While Australia has a large range of supplies that are exempt from GST, including essential goods and services, Singapore only has a limited number of exempt supplies.

Investment Income

In Australia you are taxed on investment income at your own individual marginal tax rate. However you are also typically able to claim tax credits for any tax that the company has paid on income that is distributed to you.

In Singapore a company pays taxes on its own chargeable income. This is the final tax paid, and investment income that is passed on to shareholders is not taxed in their hands. (If the investor is a non-resident, they would only be liable for non-resident taxes in accordance with their country of residence).

Running a Company

If you plan to run a company in Singapore there are a wide range of requirements that you need to understand in terms of setting up and running the company. Not the least of these is that, from a taxation perspective, the first three years of operation are tax free for the first $100,000 of chargeable income. After this the company tax rate is only 17%. In Australia the company tax rate is currently 30%.

	AUSTRALIA	SINGAPORE
Capital Gains Tax	Taxable Income. Capital Losses are quarantined and can only be offset against other capital gains. If you cease to be an Australian resident you will be deemed to have disposed of any GST assets that are not Australian real property for Australian tax purposes.	No Capital Gains tax.
GST	10% There are an extensive number of exemptions including financial supplies, residential rent, and basic essentials such as raw food and medicine.	7% Exemptions include financial services, digital payment tokens, sale & lease or residential property, and important and supply of investment precious metals.
Investment/Dividend Income	Individuals declare the cash and franking credit that they are distributed. The franking credit counts as a tax credit and the ATO will refund any difference between the franking credit (which is at the company tax rate) and the individual’s tax rate, or the individual is required to pay additional tax if their marginal tax rate is higher than the company tax rate.	Taxes paid by companies are the final taxes chargeable on income. Shareholders are not taxed on dividends they receive from resident companies.
Company Tax Rate	30%. Small business entities (under 2 million turnover) are taxed at 28.5%.	17%. For the first 3 years, newly incorporated companies are given a full tax exemption for the first $100,000 of chargeable income.

Tax Differences between Australia and Singapore

While there are some commonalities in the foundation from which the Australian and Singapore systems have grown, there are a lot of differences. These differences range from terminology to timing, what income is taxed, at what point it is taxed, and the tax rate.

As outlined above, there is an appeal in being taxed under the Singapore regime. For instance, the tax rates are lower, there is no CGT, and investment income is not typically tax in the hands of the individual it is distributed to. If you are considering making this move, ensure that you fully understand your personal situation and have a good understanding of whether you would be a Singapore tax resident. It is always important to speak to a professional advisor for a more detailed assessment of your specific situation. 

The biggest personal tax residency case in 40 years just got bigger. The taxpayer Mr Glen Harding having lost his case in front of a single judge in the Federal Court has won an emphatic victory in the Full Federal Court in a decision handed down on 22 February 2019.

In Harding v Commissioner of Taxation [2018] FCA 837 in a unanimous decision the Court found that Glen Harding was not a resident of Australia because;

• he did have a Permanent Place of Abode in Bahrain; and
• he did not reside in Australia;

As we reported last year in our blog (an Appeal to Common Sense) the taxpayer, Glen Harding, appealed from an initial Federal Court decision against him.

The Facts of Harding’s case were, in essence, that Mr Harding, in his evidence, had abandoned his residence in Australia, with the intention never to return. However, in establishing life in Bahrain, he lived in an apartment building called “Classic Towers”. Initially he took a two bedroom apartment because he believed that his wife and children would visit him from time to time.  He remained in that apartment from 10 June 2009 until 9 June 2011.  When his marriage broke down around 2011 and he realised that his wife would not be moving to Bahrain, he moved in to a one bedroom apartment where he remained until 9 June 2012.

The case was all about whether Mr Harding was a resident in Australia for the income tax year ended 30 June 2011 and the single judge in the first instance found that because of the style of accommodation that Mr Harding chose in Bahrain, being a fully furnished apartment, he had not established a permanent place of abode in Bahrain, despite several other factors which demonstrated that he was living in Bahrain.

Several principles of residency law were analysed in detail by the Court. However, the main focus was on the question of what was meant by the phrase ‘Permanent Place of Abode’. A clear understanding of that phrase is critical because of the definition of tax residency in Section 6(1) of the Income Tax Assessment Act 1936.

That definition says that a person is a resident of Australia if they reside in Australia and includes a person who is Australian domiciled unless the Commissioner would be satisfied that the person has established a Permanent Place of Abode outside Australia.

Most Australian expats who move overseas will remain domiciled in Australia and hence, unless they can show that they have established a permanent place of abode overseas, will remain fully taxable in Australia. It has never been the case that an Australian who is itinerant overseas avoids taxation in Australia.

So the question ‘what is a Permanent Place of Abode?” is critical. In their joint decision,  Davies and Steward JJ with Logan J in agreement, indicated that the word ‘place’ should be read as including a reference to a country or state and they expanded by saying;

In the context of the legislative history, in our view, the phrase “place of abode” is not a reference, as one might have thought, only to a person’s specific house or flat or other dwelling.  If that had been Parliament’s intention it would have used the phrase “permanent abode” rather than “permanent place of abode”.  The word “place” in the context of the phrase “outside Australia” in subpara (i) invites a consideration of the town or country in which a person is physically residing “permanently”.

In taking that approach, the Court referred to the analysis of Sheppard J in Applegate’s case where he indicated that as follows:

“place of abode”’ may mean the house in which a person lives or the country, city or town in which he is for the time being to be found.  I am of the view that the latter is the meaning of the expression used in s. 6(1.) of the Act.  Thus a person might be correctly said to have a permanent place of abode in, say, Vila, notwithstanding that during a given period he lived in a number of different establishments occupying each for only a relatively short period.  His case is no different from one where a person, such as the appellant here, lives, for a substantial period, in the same house.

So here we see, for the first time, a definite focus by the Federal Court on the permanence in a particular jurisdiction as being of paramount importance rather than the particular ‘type’ of accommodation that a tax payer chooses to live in within that jurisdiction.

If this decision stands, it would be a victory for common sense, because if a person is living permanently in a particularly city it should not be critical what type of accommodation the person chooses to live in.

Author: Matthew Marcarian

The taxpayer, Mr Harding has appealed to the Full Federal Court of Australia from a decision handed down on 8 June 2018 by Justice Derrington, in Harding v Commissioner of Taxation [2018] FCA 837. In that case His Honour, found that Mr Harding was resident of Australia for tax purposes under the Domicile Test, because he failed to establish a ‘permanent place of abode’ in Bahrain during the relevant year, even though he left Australia permanently in 2009 and lived in Bahrain until 2015, before moving to Oman.

We believe the decision creates significant uncertainty and we are glad to see it appealed.

What happened in the case?

In 2009 Mr Harding departed Australia to take up full time employment in Saudi Arabia. He chose to live in Bahrain (as is commonly done) and obtained a visa to do so. Mr Harding and his wife Mrs Harding had previously lived overseas in the Middle East.

On the facts outline in the case, Mr Harding seemed to have lived in the one apartment in Bahrain for almost 2 years from June 2009 to 9 June 2011, including almost all of the year ended 30 June 2011 – which was the year in dispute in the case.

Matters were apparently made complicated for Mr Harding because on this occasion his wife (and his children) did not accompany him to Bahrain initially and after going so far as to enrol his youngest son into the British School in Bahrain, Mr Harding’s marriage did not survive.

There is a some suggestion that Mr Harding only secured a two bedroom apartment when he initially moved to Bahrain, perhaps because he knew that when his family moved (as he intended that they would) more suitable accomodation would be required. His Honour also appeared to be completely convinced that Mr Harding had departed Australia permanently – even going so far as to list the things which he considered were evidence of that fact.

What was the problem?

The problem for Mr Harding was that even though His Honour was convinced that he had left Australia permanently (and was not resident according to ordinary concepts), His Honour was not convinced that Mr Harding had established a ‘permanent place of abode’ in Bahrain. Consequently since Mr Harding was an Australian domicile – he was still a tax resident of Australia.

This is because of the operation of the ‘Domicile Test’ in Australia’s residency laws. The Domicile Test treats all persons who have their domicile in Australia as being tax resident, unless they can show that they have a ‘permanent place of abode’ outside Australia. We believe that the concept of Permanent Place of Abode is a settled concept under Australia’s tax law and has been so for over 40 years since FC of T v Applegate 79 ATC  4307 (Applegate). The concept of ‘place of abode’ has its ordinary meaning and the use of the word ‘permanent’ in connection with an abode simply implies a place which is not temporary.

Given that the Court agreed that Mr Harding;

– made his life in Bahrain;
– had a visa to reside in Bahrain and in fact resided in Bahrain;
– owned a car in Bahrain;
– had exclusive use of an apartment in Bahrain which he leased (which the Court agreed was not short-term accomodation; see para 75);
– travelled every day from Bahrain to his full time place of work in Saudi Arabia;

we find it difficult to see why Mr Harding was found not to have a permanent place of abode in Bahrain.

The factors that seemed to be held against Mr Harding were that he did not own many possessions (given the apartment was fully furnished) and it was reasonably easy for him to move between apartments in the same complex which he did in July 2011 (after spending almost 2 years in the fist apartment) when it became apparent that Mrs Harding was not going to move to Bahrain.

It also seemed to weigh strongly on His Honour’s considerations that Mrs Harding did not seem to want to live in the original apartment Mr Harding had chosen (even though it was big enough to house the family) and that Mr and Mrs Harding together looked at alternative accomodation when she visited him in Bahrain.

A relevant fact also apparently was that Mr Harding’s postal mail was not sent to Bahrain, but continued to be sent to his former home in Australia. In relation to this His Honour remarked in his closing remarks (para 149) that “It is indicative of an intention to reside at premises permanently or, at least, not temporarily if that place is used as the address for correspondence. Were a person to use their apartment address as that to which important correspondence is to be addressed it can be thought that they are intending to remain there for an extended period of time.” We cannot understand why His Honour considered that the receipt of postal mail in Australia was of material significance, when by contrast His Honour did not see it as particularly significant that Mr Harding had continuing financial arrangements with Australia (paragraph 85).

Factors suggesting Mr Harding did have a Permanent Place of Abode was in Bahrain

The strangeness of the decision here is compounded by the fact that although Mr Harding’s contract of employment was only for 12 months, when Counsel for the Commissioner argued that Mr Harding’s presence in Bahrain was ‘somewhat tenuous’ because of this, His Honour responded by remarking (correctly in our view) on the permanent nature of Mr Harding’s departure from Australia, his intention never to return to Australia to live, and his working history which demonstrated that was ’eminently employable’, effectively dismissing the Commissioner’s argument that the short term nature of the employment contract was a material weakness in the case.

Indeed at para 147 His Honour remarks that “An associated argument advanced by the Commissioner was that as Mr Harding’s employment in the Middle East might be terminated at short notice, his presence there was necessarily of a transitory nature. That submission, however, fails to take into account that Mr Harding was intent on remaining in the Middle East, although not necessarily in Bahrain, and his presence there was not, necessarily, tied to his continued employment with TQ Education.”

The decision in this case is all the more puzzling given that His Honour accepted that Mr Harding took leases of the apartments as extended term propositions also accepting that“that Mr Harding made his life in Bahrain. It was the place from which he commuted daily to his work in Saudi Arabia. He formed friendships there and it was where he attended restaurants and bars after work. He also went to the beaches there and engaged in go-carting at the local grand prix track. In general terms, he pursued the expatriate lifestyle with which he had been familiar for many years.”

Implications for Australian Expats

We hope that the decision in Harding is overturned on appeal. The answer to question of whether a person has established a ‘permanent place of abode’ overseas should be arrived at simply and in a common sense fashion, by considering whether the taxpayer has only a temporary place of abode in the country.

For residency purposes if a place is not temporary then it must be permanent otherwise a person cannot have any certainty.  Surely we cannot have a third class of residency, being a state of being somewhere in the middle of temporary and permanent.

If the Court accepts that Mr Harding ‘made his life in Bahrain’ it should accept that he had a permanent place of abode there, regardless of where his postal mail is sent to.

It is pertinent to conclude by reflecting on the often quoted words of Fisher J in Applegate who said;

“To my mind the proper construction to place upon the phrase ‘permanent place of abode’ is that it is the taxpayer’s fixed and habitual place of abode. It is his home, but not his permanent home..Material factors for consideration will be the continuity or otherwise of the taxpayer’s presence, the duration of his presence and the durability of his association with the particular place.”

We look forward to a common sense judgement from the Full Federal Court in Mr Harding’s case.

UPDATE: On 22 February 2019, the Full High Court handed down a decision on the Harding v Commissioner of Taxation [2018] FCA 837  case. Please see Residency – Harding’s Appeal Victory for the decision.

Author: Matthew Marcarian

As we reported in our blog last year – the Australian Government announced that it would remove the CGT main residence exemption for foreign residents.

It was said that this reform was being introduced as part of measures to address housing affordability in Australia. Due to other legislative priorities a bill to enact the change was not introduced and we had hoped that the Government would have taken the time to ensure grandfathering of all existing properties.

However the bill was re-introduced earlier this month as Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018, apparently unchanged after the exposure draft consultation period last year.

The Bill has now been referred to a Senate Standing Committee which represents the last opportunity to lobby for changes to be made to the Bill. Submissions close 5 March 2018.

What Is The Problem?

In trying to tighten our CGT laws, the Bill denies Australians living abroad access to the “CGT absence concession”. This existing concession gives many Australian expats the opportunity to retain the CGT exemption on their former home for up to 6 years, even if they rented their home out after they had moved overseas. This exemption will be removed.

Disastrously though, the changes seem to be more fundamental. The Bill, as drafted, denies even a partial CGT exemption by providing no CGT relief even for the period of time when the person had lived in their home before departing Australia. The Explanatory Memorandum to the Bill makes this alarming problem crystal clear (see Example 1.2 which is extracted below). We do not believe this was the Government’s intention.

The only way out under the draft Bill is that taxpayers seem to be allowed to move back into the property after returning to Australia (as a resident) and to then sell the home on a CGT free basis (assuming the absence exemption otherwise applies). This creates a tax-driven ‘lock-in’ effects which is likely to create significant issues for taxpayers and rather than assist housing supply could in fact create further supply constraints.

Does This Apply To You?

If you are an Australian expatriate then the Bill provides that unless you sell your former home prior to 30 June 2019, you will be subject to CGT on the sale of the property if you sell it after that date while you are still a non-resident of Australia for tax purposes. Unfortunately, as currently drafted, the Bill would not even provide you with a partial CGT exemption to recognise the period of time that you lived in your home prior to your departure. To preserve your CGT exemption you would be left with the choice of either selling prior to 30 June 2019 or else keeping the property until you one day return to Australia.

The tightness of the 30 June 2019 deadline has seen concerns expressed in the Australian Financial Review recently about a fire sale in expat owned property. While predictions of a fire sale may not be true, it is nonetheless a highly unfair position to put home owners in and the Bill represents poor policy implementation.

Artificially ending the absence concession by using a ‘drop dead date’ on 30 June 2019 is highly equitable. It will mean that failure to sell by 30 June 2019 could mean that an Australian living overseas could be exposed to hundreds of thousands of dollars of tax, given the increases in Australian property over the last 3 years.

What Should Be Done To Fix This?

We strongly urge the Government to fix the Bill by ensuring that amendments are made so that:

• all Australian expatriates who were already non-resident of Australia when the changes were announced on 9 May 2017, should continue to be able to access the absence concession regardless of where they reside; and
• all persons should be able to access the partial CGT exemption for at least that part of the ownership period during which they lived in the property and were resident of Australia.

We believe that the flaws in this Bill are an oversight that will be rectified once these problems are better understood. In our experience most Australians living abroad who keep their home in Australia do pay taxes and continue to contribute to the Australian economy.

If the Government wishes to persist with the change of law to only permit CGT exemptions for those who are tax resident in Australia –  then they should ensure that they are fair to the thousands of Australians who have moved overseas (most of whom will return) but who have retained their former homes in Australia.

Final submissions are now being requested and we strongly recommend that interested parties make a submission on this inequitable change.

You can contact your local member of parliament and forward this blog.

If you are concerned about the unfairness of this change submissions can be made to.

Committee Secretariat Contact:

Senate Standing Committees on Economics
PO Box 6100
Parliament House
Canberra ACT 2600

Phone: +61 2 6277 3540
Fax: +61 2 6277 5719
economics.sen@aph.gov.au

Extract from Explanatory Memorandum to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018

Example 1.2 — Main Residence Exemption Denied

Vicki acquired a dwelling in Australia on 10 September 2010, moving into it and establishing it as her main residence as soon as it was first practicable to do so. On 1 July 2018 Vicki vacated the dwelling and moved to New York. Vicki rented the dwelling out while she tried to sell it. On 15 October 2019 Vicki finally signs a contract to sell the dwelling with settlement occurring on 13 November 2019. Vicki was a foreign resident for taxation purposes on 15 October 2019. The time of CGT event A1 for the sale of the dwelling is the time the contract for sale was signed, that is 15 October 2019. As Vicki was a foreign resident at that time she is not entitled to the main residence exemption in respect of her ownership interest in the dwelling. Note:

This outcome is not affected by:

• Vicki previously using the dwelling as her main residence; and

• the absence rule in section 118-145 that could otherwise have applied to treat the dwelling as Vicki’s main residence from 1 July 2018 to 15 October 2019 (assuming all of the requirements were satisfied).

Overview of Tax Residence Rules

The Singapore Tax Act classifies taxpayers as either residents or non-residents. This is important because residents and nonresidents are taxed in a different manner.

Note that the concept of “domicile” is not relevant for Singapore income tax liability. “Residence” is the relevant test and this is defined under Section 2 of the Singapore Tax Act.

The definition includes a “qualitative test” as an individual who “resides” in Singapore in the year preceding the year of assessment is regarded as a tax resident in Singapore.

This turns on a number of factors. The term ‘reside’ is not statutorily defined and therefore it is to be given its ordinary meaning when interpreting Singapore law.

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