Case R92

Judges:
KP Brady Ch
JE Stewart M
DJ Trowse M

Court:
No. 2 Board of Review

Judgment date: 20 September 1984.

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K.P. Brady (Chairman), J.E. Stewart and D.J. Trowse (Members)

The question for decision in this reference is whether the salaried income received by the taxpayer whilst employed in the Philippines during the 1979 income tax year represents assessable income in terms of the provisions contained in sec. 25(1) of the Income Tax Assessment Act 1936, or, conversely, whether such receipts constitute exempt income under either sec. 23(r) or 23(q). It was common ground that the taxpayer had retained his Australian domicile during the relevant period and that the source of the salary was ex-Australia. The period of employment in the Philippines was from April 1978 to July 1980.

2. During the 1979 year of income, the taxpayer, a qualified engineer, was employed in turn by a consultancy company and then by one of its affiliates specialising in the provision of engineering services to overseas projects. His income tax return for that year was prepared and lodged on the basis that the salary received from those engagements, and which totalled an amount of $15,644, represented assessable income. Upon the receipt of the resultant assessment, the taxpayer's accountant objected

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to the inclusion of that amount as assessable income and cited the following grounds:

``1. That -

• (a) in the period during which the taxpayer derived the said sum of $15,644 he was not a resident of Australia within the meaning of that expression as defined in sec. 6(1) of the said Act because -
  • (i) the taxpayer did not reside in Australia;
  • (ii) the taxpayer's domicile was not in Australia, or, alternatively, if his domicile was in Australia, which is not admitted, there was no evidence or, alternatively, there is now no evidence, that would justify the formation of an opinion by the Commissioner that he was not satisfied that his permanent place of abode was outside Australia and if the Commissioner formed such an opinion his reasons therefore were inadequate or irrelevant and, accordingly, the opinion was formed upon improper principles and should be reviewed and corrected by him;
  • (iii) the taxpayer was not actually in Australia, continuously or intermittently, during more than one-half of the said year of income, or, alternatively, if he was in Australia, continuously or intermittently, during more than one-half of the said year of income, which is not admitted, there was no evidence or, alternatively, there is now no evidence, that would justify the formation of an opinion by the Commissioner that he was not satisfied either that his usual place of abode was outside Australia or that he did not intend to take up residence in Australia and if the Commissioner formed such an opinion his reasons therefore were inadequate or irrelevant and, accordingly, the opinion was formed upon improper principles and should be reviewed and corrected by him; and,
• (b) the said sum of $15,644 represents income derived by the taxpayer whilst he was not a resident of Australia within the meaning of that expression as defined in sec. 6(1) of the said Act and was not derived by him directly or indirectly from sources in Australia;
• and that, accordingly, the said sum of $15,644 is not assessable under either sec. 25(1) or any other provision of the said Act and should not have been included in his assessable income and should be excised therefrom.

2. That the said sum of $15,644 represents income derived by the taxpayer whilst a non-resident within the meaning of that expression as defined in sec. 6(1) of the said Act and was derived from sources wholly out of Australia and, accordingly, the whole of the said sum is exempt from income tax by virtue of sec. 23(r) of the said Act.

3. Alternatively, that even if the taxpayer was a resident of Australia within the meaning of that expression as defined in sec. 6(1) of the said Act in the period during which the said sum of $15,644 was derived, which is not admitted, then the said sum is exempt from income tax by virtue of sec. 23(q) of the said Act in that it represents income derived by the taxpayer from sources out of Australia which income is not exempt from income tax in the country where it was derived, namely, the Philippines, and there is not evidence or, alternatively, there is no evidence, that would justify the formation of an opinion by the Commissioner that he was not satisfied that the liability for income tax in the Philippines has been or will be discharged by payment and if the Commissioner formed such an opinion his reasons therefore were inadequate or irrelevant and, accordingly, the opinion was formed upon improper principles and should be reviewed and corrected by him.

4. Alternatively, that even if some part of the said sum of $15,644 should be included in my assessable income for the said year of income, which is not admitted, then the balance of the said amount should be excluded therefrom.''

In considering 1(a)(ii), it should be observed that the taxpayer, at the hearing, conceded that he had retained his Australian domicile whilst overseas.

3. However, the Commissioner took the view that the taxpayer had been a resident of Australia throughout the whole of the year under review and that, accordingly, the income

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resulting from the employment in the Philippines had been correctly included as assessable income under sec. 25(1), and, furthermore, that such income was not exempt in terms of the provisions contained in sec. 23(r) or 23(q). The taxpayer, being dissatisfied with the Commissioner's decision on the objection, requested that the matter be referred to a Board of Review for review. At the hearing, the taxpayer gave evidence under oath and was represented by Counsel. The Commissioner was also represented by Counsel.

4. The taxpayer had been born and educated in Northern Ireland, and it seems that soon after his marriage in March 1970 he and his wife resolved to migrate to Australia because of the religious and political problems being encountered in their country of origin. They arrived in Australia in August 1970, and within a short period the taxpayer was engaged as an engineer by the same organisation which continued to employ him up to and including the 1979 year. It appears that one of the assignments performed by the taxpayer in that role concerned the reclamation of a lake area for the purpose of establishing a housing estate, and that the experience gained on the project was influential in his selection for the position of senior design engineer to a similar type development undertaken by the National Housing Authority in the Philippines, and which was jointly supervised by the taxpayer's employer group. It involved the reclaiming of a swamp area which was then to be utilised in providing low cost housing. Those capital works were to be funded by the Philippines Government in conjunction with borrowings from the World Bank. During the period 1 August to 7 September 1977, the taxpayer, at the direction of his employer, made an interim visit to the Philippines for the express purpose of participating in the preparation of a feasibility study which, in brief, was required to ascertain whether the plan was viable from a structural viewpoint and, also, to determine an estimate of the likely overall cost.

5. The taxpayer accepted the overseas appointment and departed Australia in April 1978 with the responsibility of supervising the implementation of the design function associated with the first phase of the project. He was accompanied by his wife and three children, the youngest at that stage being aged two months. All costs attaching to the transfer were borne by the employer. It seems that the Philippines Government had resolved to proceed with the work related to the initial stage notwithstanding the absence of final loan approval from the World Bank, and that that premature decision caused some uncertainty as to the tenure of the taxpayer's appointment. Whilst it seems that there existed the possibility that such employment might be short term, i.e. three to four months, the evidence adduced provided a clear indication that the expectations of the taxpayer and his employer were that the duties appertaining to the posting would be ongoing and co-related to the performance of the contract with the National Housing Authority and any extensions thereto. That degree of optimism is adequately reflected in the following extract taken from a letter of reply written by the employer to the Commissioner on 14 December 1979:

``Our group has been involved in Manila on the same project since April 1977 and has received a number of extensions to the initial contract. We are confident of obtaining further work after 30 June 1980, and there is a strong probability that [the taxpayer] will be asked to extend his term of employment past the 30 June 1980.''

Having regard to the timetable of events laid down in the feasibility study, the taxpayer estimated that his stay in the Philippines would be for a minimum period of three to four years, and it was for that reason he decided to relocate his family in that country. In that regard, the taxpayer had various household items, including a sewing machine, cutlery, blankets, linen and children's toys, transported to his new overseas address.

6. The taxpayer acknowledged that it was his intention to return to Australia at some time in the future and, with that in mind, he and his wife elected to retain their jointly owned home which was leased on a partly furnished basis throughout the duration of their absence. The initial term of the lease was for six months, and upon expiration it was renewed monthly. The taxpayer explained that, as the overseas appointment carried an entitlement to receive a housing establishment allowance, there was no advantage in transporting his furniture to the new location and, furthermore, there existed the possibility that the accommodation to be selected might include goods of a similar description. The taxpayer and his spouse

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continued to operate their existing joint cheque and savings bank accounts during their absence; the cheque account was used to accept rental receipts and to pay mortgage instalments and life assurance premiums, whereas the main function of the savings account was to receive transfers of salary. Also, there existed a children's trust account with a building society, the sole purpose of which was to receive child endowment payments which, incidentally, endured until December 1979. It seems the taxpayer, in recognition of the monetary uncertainties prevailing in the Philippines at that time, concluded that his funds would be more secure in Australia, and for that reason he decided to maintain his investments there. However, it should be recorded that the taxpayer did open a cheque account in Manila for the purpose of settling local outstandings, and that it was funded by way of regular transfers from Australia. Finally, it was observed that the taxpayer continued on his membership with an Australian-based private health fund during his stay overseas.

7. Upon arriving in the Philippines, the taxpayer and his family resided for short periods, first, at a hotel, and, secondly, in an apartment. Not satisfied with those types of accommodation, the taxpayer negotiated the sub-lease, and later extensions thereto, of a house which they occupied until their return to Australia in July 1980. The home was furnished by the taxpayer from the allowance provided by the employer. It appears that during the overseas stay of approximately 27 months, the taxpayer and his wife participated in social and recreational activities and the two eldest children attended English-speaking schools.

8. The evidence indicated that by June 1980 the work on the reclamation project had progressed to such a stage that the services of a senior design engineer were no longer warranted on a full-time basis and, in view of that advancement and the uncertainty of additional extensions, it was agreed that the taxpayer should return to Australia. As previously mentioned, the taxpayer and members of his family were repatriated to Australia in July 1980, and thereupon recommenced the occupancy of the jointly owned house property. At the same time, the taxpayer was re-engaged by the Australian arm of the consultancy group.

9. A copy of the contract entered into by the consultancy group and the National Housing Authority (NHA) was tendered at the hearing, and the following information extracted from same is relevant to the matters under consideration:

``ARTICLE VI

Undertakings of the Government and NHA.

• 6.01 Taxes, customs and duties

The Government and NHA agree to:

• A. Exempt the Consultant and its non-Filipino employees from any and all taxes, contributions, or charges, in force or that may be established in the future in the Philippines by the Government of the Philippines or any of the political subdivision thereof during the life of this Contract. This exemption will cover requirements for licences, permits, customs, duties, import taxes, income taxes, assessment...''

Furthermore, the taxpayer's evidence was that he paid no income tax to the Government of the Philippines on any of the income derived from within that country during the year under review.

10. In examining the taxpayer's submissions, we shall commence with a consideration of the provisions contained in sec. 25(1).

``The assessable income of a taxpayer shall include -

• (a) where the taxpayer is a resident -
  • the gross income derived directly or indirectly from all sources whether in or out of Australia; and
• (b) where the taxpayer is a non-resident -
  • the gross income derived directly or indirectly from all sources in Australia,

  which is not exempt income...''

In view of the agreement that the source of the salary received by the taxpayer was ex-Australia, we confine our enquiry to the questions associated with residency and exemption.

11. Section 6(1) provides the following definitions of resident and non-resident:

```resident' or `resident of Australia' means -

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• (a) a person, other than a company, who resides in Australia and includes a person -
  • (i) whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia;
  • (ii) 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 his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or
  • (iii) who is an eligible employee for the purposes of the Superannuation Act 1976 or is the spouse or a child under 16 years of age of such a person; and
• (b)...''

```non-resident' means a person who is not a resident of Australia.''

Whilst the taxpayer's absence from Australia throughout the whole of the 1979 year suggests that he was not a ``resident'' here during that time, there still remains the point conceded by the Commissioner that he retained his Australian domicile of choice for that same period. We concur with the statement made by taxpayer's counsel that the descriptions afforded in placita (ii) and (iii) of the definition of ``resident'' are not applicable to the fact situation existing in the present reference and that the answer to the dispute will depend on an interpretation of the words ``permanent place of abode'' appearing in placitum (i).

12. The meaning of the word ``abode'' was considered by Lord Campbell C.J. in
R. v. Hammond (1852) 117 E.R. 1477, at p. 1488, where he said:

``A man's residence, where he lives with his family and sleeps at night, is always his place of abode in the full sense of that expression.''

Having regard to the facts of the current reference, we experience no difficulty in concluding that the taxpayer's place of abode was outside Australia during the year under review. Therefore, the remaining matter to be determined is whether the Board, standing in the position of the Commissioner (sec. 193(1)), is satisfied that his permanent place of abode was outside Australia. If so, then the result will be that the taxpayer was a non-resident as defined in sec. 6(1). We accept that it was always the intention of the taxpayer and the employer that the taxpayer would return to Australia at some time in the future and that the period of absence was not specified or defined at the outset. An analysis of the evidence leads to the conclusion that it was anticipated the taxpayer would remain in the Philippines until the completion of the assignment which would probably take several years, or even longer, if additional extensions had been forthcoming.

13. The leading authority on the question of a permanent place of abode outside Australia is
F.C. of T. v. Applegate 79 ATC 4307. In that case, the Full Federal Court held that a solicitor, sent overseas for an indefinite period to open up a branch office, had established a permanent place of abode outside of Australia notwithstanding the possession of an intention to eventually return to Australia. The following extracts from the judgments are apposite to the matter now under consideration -

Franki J., at p. 4309:

``Accordingly in my opinion the phrase `permanent place of abode outside Australia' is to be read as something less than a permanent place of abode in which the taxpayer intends to live for the rest of his life.

There is nothing in the subsection which requires the intent of the taxpayer to be the critical factor even though it is, of course, a relevant factor. Essentially the question is whether, as a matter of fact the taxpayer's permanent place of abode was outside Australia at the relevant time.''

Northrop J., at pp. 4313 and 4314:

``The word `permanent' can have many shades of meanings. This is illustrated by a reference to the Shorter English Oxford Dictionary. And as was said by du Parcq L.J. in
Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd. (1942) 2 K.B. 184 at p. 196:

• ``Permanent' is indeed a relative term, and is not synonymous with `everlasting'.'

The word `permanent' must be construed according to the context in which it appears,

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see per Lord Evershed in
McClelland v. Northern Ireland General Health Services Board (1957) 2 All E.R. 129 at p. 140.

In the present case the phrase `permanent place of abode' appears in a taxing statute by which income tax is levied on income derived during a financial year. Where a taxpayer resides in Australia, the assessable income of that person includes the gross income derived from all sources but where the person does not reside in Australia, then subject to the extended meaning given to the word `resident', the assessable income of that person includes the gross income derived from all sources in Australia only, it does not include the gross income derived from sources outside Australia. The tax is assessable on gross income received on an annual basis and is assessed on an annual basis. The word `permanent' as used in para. (a)(i) of the extended definition of `resident', must be construed as having a shade of meaning applicable to the particular year of income under consideration. In this context it is unreal to consider whether a taxpayer has formed the intention to live or reside or to have a place of abode outside of Australia indefinitely, without any definite intention of ever returning to Australia in the foreseeable future. The Act is not concerned with domicile except to the extent necessary to show whether a taxpayer has an Australian domicile. What is of importance is whether the taxpayer has abandoned any residence or place of abode he may have had in Australia. Each year of income must be looked at separately. If in that year a taxpayer does not reside in Australia in the sense in which that word has been interpreted, but has formed the intention to, and in fact has, resided outside Australia, then truly it can be said that his permanent place of abode is outside Australia during that year of income. This is to be contrasted with a temporary or transitory place of abode outside Australia.''

Fisher J., at p. 4317:

``It follows that it is in my view proper to pay greater regard to the nature and quality of the use which a taxpayer makes of a particular place of abode for the purpose of determining whether it qualifies as his permanent place of abode. His intentions with respect to the duration of his residence is just one of the factors which has relevance. Obviously if his stay is purely temporary and he intends to move on or return to Australia at some definite point of time this denies the place of abode an essential characteristic of a home, namely durability. Moreover, it seems appropriate to view objectively the nature and quality of the use which the taxpayer makes of the place of abode to determine whether it has the characteristics of his fixed place of abode, his home. It is to my mind perfectly consistent with the establishing of a home in a particular place that the taxpayer is aware that the duration of his enjoyment of the home, although indefinite in length, will be only for a limited period. The knowledge that eventually he will return to the country of his domicile does not in my opinion deny him a capacity to make his home outside of his country domicile. Such a conclusion is particularly open in the present circumstances where the taxpayer was not a completely free agent in the choice of when to return, it being a matter for negotiation between him and his employers.''

14. In the present reference, we are of the opinion that the taxpayer left Australia for an indefinite period and that his stay in the Philippines could not be described as temporary or transitory. Having regard to the nature and quality of the use of the place of abode in the Philippines and the judicial pronouncement that each year of income must be looked at separately in examining the meaning of the word ``permanent'', we are satisfied that the taxpayer had a permanent place of abode outside of Australia during the 1979 year of income. In reaching that decision, we have not been unmindful of the retention of assets by the taxpayer in Australia, the continuance of child endowment payments for a time and the taxpayer's maintenance of private health insurance. Whilst those factors may act as signposts in borderline cases, we do not regard any of them as having paramount significance in the present matter. In those circumstances, the salary received during that year does not, in our opinion, constitute assessable income.

15. The provisions of sec. 23(r), set out hereunder, should also be considered in conjunction with the above finding:

...

``23. The following income shall be exempt from income tax: -

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• (r) income derived by a non-resident from sources wholly out of Australia.''

In view of our finding that the taxpayer was a non-resident during the year under review, and as the source of the income was wholly out of Australia, we determine that the salary of $15,644 is exempt from income tax under sec. 23(r). We believe that our decision gains support from the judgment of Sheahan J. in
F.C. of T. v. Jenkins 82 ATC 4098.

16. We now turn to consider sec. 23(q), and point out that our finding under that subsection will have significance only if we have erred in concluding that the taxpayer was a non-resident. The wording of that subsection, as it relates to this reference, reads:

``23. The following income shall be exempt from income tax: -

• (q) income (other than an amount of income attributable to a dividend, being a dividend paid on or after 19 October 1967) derived by a resident from sources out of Australia and Papua New Guinea, where that income is not exempt from income tax in the country where it is derived...
• Provided that this paragraph shall not apply to exempt any income unless -
  • (i) where there is a liability for payment of income tax in the country where that income is derived - the Commissioner is satisfied that the tax has been or will be paid; or
  • (ii)...''

In general terms, the function of sec. 23(q) is to exempt from tax income derived by a resident from sources outside Australia, where that income is not exempt from tax in the country of derivation. In
Australian Machinery & Investment Co. Ltd. v. D.F.C. of T. (1946) 8 ATD 81, Dixon J., as he then was, expressed the opinion (at p. 100) that the word ``exempt'', as used in the context of the phrase ``not exempt from income tax'', does not mean that the income must be the subject of a specific exemption or exception under the law of the country where it is derived. He concluded that it is used inartificially to mean ``not subject to tax''. The High Court once more examined the provisions of sec. 23(q) in
F.C. of T. v. Angus (1960-61) 105 C.L.R. 489, and the following pronouncement made by Fullagar J., at p. 510, is pertinent to the matter now under consideration:

``... it is the income, and not the person who receives the income, that is required to be `not exempt' by sec. 23(q).''

Our researches into the taxation system as it existed in the Philippines during the 1979 year of income, which included a study of a paper delivered by M.C. Gutierrez at the First International Convention of the Taxation Institute of Australia held in Hong Kong in June 1979, indicates that the salary income received by the taxpayer answers the description of ``being subject to tax'' in that country. On that basis, we believe that it is correct to say that the income in question was not exempt from income tax in the country of derivation. However, it is necessary to determine whether the proviso contained in (i) denies the application of the subsection. It will be recalled, see para. 9, that the taxpayer, as distinct from the income received by him, had been granted exemption from the payment of income tax in the Philippines, and accordingly it is clear that a liability for the payment of income tax in that country did not arise. In those circumstances, we are of the opinion that the proviso has no application. It is our conclusion that the salary of $15,644 is, in terms of sec. 23(q), exempt from income tax.

17. It is appropriate to mention that the double tax agreement currently in existence between the Governments of Australia and the Philippines did not come into operation until some time after the year under review, and therefore there was no necessity to consider its provisions.

18. For the above reasons, we uphold the taxpayer's objection and direct that the amount of $15,644 be deleted from his assessable income in respect of the 1979 year.

Claim allowed