Case T28

Judges:
KP Brady Ch
JE Stewart M
DJ Trowse M

Court:
No. 2 Board of Review

Judgment date: 30 May 1986.

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

This reference relates to the year of income ended 30 June 1981, during which period the taxpayer, a chartered accountant, derived income from employment in the London office of an international firm of chartered accountants which we shall call AB. The taxpayer had an Australian domicile at the time of departing from his home city of Perth for the United Kingdom in company with his wife in January of 1979, and it was common ground that he was a resident of Australia prior to that date. He resigned from his position in the United Kingdom firm on 6 April 1981, and, after taking an extended holiday with his wife in Europe, the United States and South East Asia, he returned to Australia on 15 October 1981. The matter at issue is the assessability to Australian tax of the income derived by him in the United Kingdom in the year in issue.

2. At the hearing, the taxpayer conducted his own appearance and gave evidence on oath. The Commissioner was represented by one of his officers.

3. As the matter in issue needs to be determined upon an objective consideration of all the facts (see the comments of Fisher J. in
F.C. of T. v. Applegate 79 ATC 4307 at p. 4316), we find it necessary to recite the factual situation in some detail.

4. The taxpayer, whom we shall call M, told us that he joined the firm AB in Australia in January 1972 upon leaving school. He worked with the firm whilst studying accounting and allied subjects part-time, and he duly qualified as a chartered accountant. It seems that he resigned from the firm in August 1978 and took up alternative employment with a small firm of chartered accountants located some few miles out of Perth. He only stayed with that firm for a few months however, and then undertook consultancy work which again proved to be unsuitable as a future career. It seems that about that time (which we take to be in the latter half of the calendar year 1978), a number of international chartered accounting firms, including AB, were endeavouring to recruit young Australian accountants to work in their London offices in order to cope with critical shortages of professional staff.

5. The taxpayer, M, informed us that he approached his erstwhile employer, AB, to see whether he could work with the firm in London because, to use the taxpayer's own words:

``Having been a person trained by [AB], and the fact that we have uniform systems, it seemed more appropriate to join that firm than any other firm.''

It seems that negotiations with the firm were completed to M's satisfaction, and he and his

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wife left Australia on 16 January 1979, and he commenced working in the London office of AB on 5 February 1979. His wife, who was also an accountant, obtained employment with a firm of chartered accountants in Wimbledon.

6. M tabled in evidence the following letter from AB under date of 19 March 1979 (being some six weeks after he commenced his duties), detailing the terms of his employment in the United Kingdom:

``Dear...

We are pleased to confirm the terms on which you were re-employed as an audit senior on the staff of [AB] Australia and seconded to the United Kingdom firm of [AB] in London. It was agreed that this secondment would be from 7/2/1979 until April 1981 or such longer period as mutually agreed upon and you will then return to Sydney.

Your starting U.K. salary was at the rate of £5,700 per annum, which will be reviewed for the first time at 1 July 1979. Your economy air fare was paid on the understanding that you will remain for the full period of the secondment and we will pay your return air fare provided you remain in the Australian firm for two years after your return. It is also agreed that you would receive a baggage/settling-in allowance of £200 and upon arrival in London you would be accommodated in a hotel for two days or would receive the cash equivalent should you prefer to make your own arrangements.

While seconded to [AB] in the United Kingdom you will be entitled to annual leave of four weeks per annum and will also have the opportunity to take unpaid leave at certain times of the year should you wish to extend your travels.

As an employee of the Australian firm you are entitled to join the firm's retirement fund into which members contribute at the rate of 5% of salary and the firm contributes at the rate of 6% of salary. Membership of this fund is not compulsory.

Should it be necessary for either yourself or the firm to terminate your employment one month's notice in writing is required.

Will you please signify your acceptance of these terms by signing the enclosed copy of this letter in the appropriate place and return it to me as soon as possible.

Yours sincerely       I accept these terms and
[Signature]           conditions of
National              employment as set out
Director of           above.
Manpower              [Signature of Taxpayer]
                      Date 9/4/79''
          

7. It is necessary to refer here to some differences in M's own understanding of his overseas appointment as compared with some of the terms of the above letter. He prefaced his comments by advising us that the Australian firm and the United Kingdom firm, whilst sharing a common name, which indeed is used world-wide, are completely autonomous and comprise different partnerships and partners. He contended that, whilst the letter of appointment would indicate that he was employed by the Australian firm for the whole of his stay in the United Kingdom, he always considered himself to be an employee of the United Kingdom firm. He stated that his remuneration was determined by the United Kingdom firm as were his various promotions and consequential salary increases. He confirmed that payment of his salary was made in Australia by an associate company of the Australian firm with the funds being transferred to London, but he believed that the source of his income was the United Kingdom and so for the whole period of his overseas appointment he considered himself as working for the United Kingdom firm, and not the Australian firm. The thrust of those submissions of course was to show that his U.K. derived income was non-assessable for Australian tax because he was a non-resident of Australia at the time he derived it, also because it was derived from a source wholly out of Australia.

8. Stemming from those considerations, he told us that when he advised the United Kingdom firm in February 1981 that he intended to resign in the following April, he also advised the firm's National Director of Manpower in Australia (the author of the letter previously referred to) that he intended returning to Australia, and enquired as to the possibility of rejoining the Australian firm. It was then agreed that he would rejoin the Perth office, but it would seem that his particular role in the Australian firm was not finally agreed upon until some five months later when he had

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discussions with a Perth office partner who was then in London. M considered those discussions took place in July 1981 shortly before he left the United Kingdom to return, it would seem, via the United States and South East Asia to Australia. In the belief that he had terminated his secondment with the United Kingdom firm in April 1981, and did not recommence employment with the Australian firm until the following October, M contended that in the intervening period he ``travelled round the world as an individual without a job''. However, it would seem to us that M, after rejoining AB Australia in early 1979, never relinquished his employment with it. Once he completed his term of secondment, his employment with the Australian firm remained a reality even though he did not in fact work with the firm until the following October.

9. Of more relevance, perhaps, for present purposes is the agreed period of M's appointment. He told us that when he left Australia it was for an indefinite period, and pointed out that at that time he received no guarantee that he would be re-employed in Australia at the end of the period of his appointment of 27 months with the United Kingdom firm. Under oath, he stated:

``I think it fair to say that when I left to go to the United Kingdom I had no definite plans for returning to Australia. My immediate plans were to serve out the 27 months period, after which the options would be evaluated as to whether I would take up further positions in the United Kingdom, or somewhere else in the world, or return to Australia.''

On the other hand, the Commissioner's representative pointed to AB's letter of 19 March 1979, to show that the basic period of secondment was a period of fixed duration, being of 27 months from 7 February 1979, to 6 April 1981. A qualification to the prima facie certainty of that period was the fact that it might be extended if mutually so agreed. The Commissioner's representative contended that support as to the certainty of the basic period was given by the following statement contained in the second paragraph, viz.:

``Your economy air fare was paid on the understanding that you will remain for the full period of the secondment and we will pay your return air fare provided that you remain in the Australian firm for two years after your return.''

In other words (so the representative argued), the payment of the air fares by the employer was made to inject a greater measure of certainty in regard to the period of the appointment than would otherwise be the case.

10. For his part, M argued that the terms of his employer's letter were not conclusive of the issue. He informed us that there were approximately 30 to 35 Australian and New Zealand expatriates working in AB's London office at the time that he worked there, and that the letter on which the Commissioner's representative placed reliance was a standard employment contract containing demonstrable errors so far as his own appointment was concerned. As an example, he advised us that the writer of the letter had conceded, in the discussions that he had subsequently with him, that the words ``return to Sydney'' were incorrect and that the correct point of return was in fact Perth. He went on to say:

``But obviously in a practice such as ours there is no guarantee that you can come back to Perth or if you come back to Perth, that you are going to stay here particularly long. You know, if the situation was that there was not a vacancy in Perth, well, I could have ended up in Darwin or Port Moresby, or anywhere, if I wanted to stay with [AB].''

In other areas, too, M contended that the terms of the letter, because it was a standard letter of appointment, were not accurate so far as his own situation was concerned.

11. In support of his contention that his intention when leaving Australia in January 1979 was to stay overseas indefinitely, M told us that he and his wife, soon after arriving in England, arranged to buy a house in South Wimbledon. The purchase did not in fact eventuate due to the vendor changing his mind. Some little time afterwards, however, the couple succeeded in purchasing a two-bedroom apartment in South London and took possession of it in January 1980. It seems that the couple lived in it throughout 1980 and the early part of 1981, when it was sold at a small loss following upon M's wife being retrenched from her employment; that action apparently reinforced her wish to return to Australia. M went on to tell us that, in compliance with his

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wife's wishes, he advised the London office principals on 16 February 1981, that he intended to complete his period of secondment on 10 April 1981, pending clearance of his then outstanding work commitments.

12. To complete the sequence of events, it seems that the couple vacated their flat on 11 March 1981, and moved into rented accommodation. The taxpayer left work at the close of the United Kingdom 1980/1981 financial year on 6 April 1981. After an extended holiday, they returned to Australia on 15 October 1981. The taxpayer recommenced work with the Perth office of AB on 27 October 1981, as an assistant manager.

13. A brief word should now be said about M's ties with Australia for the time that he worked in London. He told us that he and his wife, before they went overseas, lived in a jointly owned home in one of Perth's suburbs. It was rented out fully furnished for the whole of the time they were away. The only other assets that the taxpayer had in Australia were a bank account and a deposit account with a building society, and his interest in the Australian firm's superannuation fund. At no time during his period of secondment did the taxpayer, or his wife, spend any time in Australia.

14. For the whole of the year of income in issue, M's only personal exertion income was his United Kingdom salary plus a living-away-from-home allowance, both of which were paid from Australia. Tendered in evidence by the Commissioner was a group certificate compiled by AB Administration Pty. Ltd., which gave details of the above items and showed that instalments of tax amounting to $1,209.10 had been deducted. Those deductions were said to be made through the Protocol to the United Kingdom Agreement as set out in Sch. 1A of the Income Tax (International Agreements) Act 1953 by which, it was submitted, the company, AB Administration, was obliged to treat M as a resident of Australia unless otherwise advised by the Australian Taxation Office.

15. Tendered in evidence by M and forming part of exhibit A was a copy of his United Kingdom tax return for the year ended 5 April 1981. That return incorporated a declaration made by him that he was not domiciled in the United Kingdom, and the accompanying notice of assessment showed that in the computation of the net amount chargeable to tax he obtained a credit of 50% of his salary income as a foreign income deduction. A copy of guidance notes issued by the Department of Inland Revenue, and which formed part of the exhibit, explained the foreign income deduction in the following terms:

``A deduction may be due against income from an employment the duties of which are performed wholly or partly abroad or from an employee who is not resident here...''

16. It seems that the Commissioner, in processing M's 1980/1981 return (which was dated 5 February 1982), assessed him, in the first instance, on the whole of his United Kingdom salary income, presumably on the basis that he continued to regard him as a resident of Australia even though he lived abroad for the whole of that year of income. That assessment was dated 11 August 1982. Subsequently, on 11 November 1982 (and doubtless prompted by M forwarding to him a copy of his United Kingdom tax assessment), the Commissioner issued an amended assessment whereby he exempted from Australian tax that part of M's salary that was subject to tax in the United Kingdom. M objected to the Commissioner's action in not treating all of his United Kingdom salary as exempt income, and the matter has now come before this Board for review.

17. It was agreed by the parties that the only question before the Board was whether M was a resident of Australia during the year of income in issue according to the extended meaning given to that word by sec. 6(1) of the Income Tax Assessment Act. The word ``resident'' or ``resident of Australia'' is there defined, to the extent considered relevant, as follows:

``(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;

...''

The evidence is clear, we consider, that M lived outside Australia for the whole of the year of income in issue, and therefore he was not a resident of Australia according to the ordinary

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meaning of that word. It was agreed between the parties that M at all times retained his domicile of origin, which was Australia. However, the Commissioner's representative asserted that M's permanent place of abode at all times during the year of income in issue was Australia; in other words, it was asserted that the Commissioner could not be satisfied that M's sojourn abroad amounted to establishing a permanent place of abode outside Australia. Just as strenuously, M contended that his permanent place of abode for the whole of the year of income was the United Kingdom.

18. Just as it is clear that M did not reside in Australia in the year of income (according to the normal meaning of ``reside''), so it is equally obvious, we consider, that his place of abode (but not necessarily his permanent place of abode) was outside Australia during the year of income. The meaning of the word ``abode'' was examined by Lord Campbell C.J. in
R. v. Hammond (1852) E.R. 1477, and at p. 1480 he stated:

``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.''

The evidence is clear, we believe, that except for the brief period subsequent to 6 April 1981, when M and his wife toured the U.K. and mainland Europe, the couple lived continuously in London in their house, and thereafter in a rented apartment, and those residences could thus be said to be their place of abode. The question that arises, however, is can those dwellings be said to amount to M's permanent place of abode, and it is to the consideration of that matter that we now turn.

19. The leading authority is the case of F.C. of T. v. Applegate (supra). There, it was held by the Full Federal Court, comprising Franki, Northrop and Fisher JJ., that the word ``permanent'' has many shades of meaning; certainly it is not synonomous with the word ``everlasting''. At first glance, that interpretation might seem somewhat unusual, but closer study reveals that in many contexts the word ``permanent'' is used to mean simply something more enduring than temporary. In giving his judgment in Applegate, Franki J. referred to a passage in the judgment of Lord Keith of Avonholm in
McClelland v. Northern Ireland General Health Services Board (1957) 1 W.L.R. 594 at p. 605, viz.:

``A mere statement that a person holds a permanent and pensionable post is very imprecise. It contains no indication of the degree of permanence or the nature and conditions of the pension.''

Considerations of that kind led the learned Judge to state, at p. 4309, that in the context of the evidence before him:

• ``... 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.''

20. Northrop J. tended to agree with Franki J., but placed a substantial emphasis on examining the taxpayer's residency situation for the particular year of income in issue. At p. 4314 he stated:

``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 if 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.''

21. The remaining judgment (as has been previously indicated) was that of Fisher J. He too considered that the word ``permanent'' could not, within the context of sec. 6(1), mean ``everlasting'', which he took to be its primary meaning. He considered that it would amount to a contradiction in terms to have the word ``permanent'' bear its ordinary meaning and so give rise to the suggestion that a person could be domiciled in Australia and at the same time have his permanent residence outside Australia. In determining whether a place of abode could qualify as a permanent place of abode, the learned Judge considered that one should examine:

• ``the nature and quality of the use which a taxpayer makes of a particular place of abode.''

He went on to conclude at p. 4317:

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``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. It connotes a more enduring relationship with the particular place of abode than that of a person who is ordinarily resident there or who has there his usual place of abode. 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.''

22. In the light of the above various matters examined by the Full Federal Court in Applegate, it was held there, notwithstanding that the taxpayer there was an Australian domiciliary, that he was not an Australian resident for purposes of the Income Tax Assessment Act. Hence, he was not liable to be assessed on income which he derived whilst working overseas.

23. The facts of Applegate have been detailed, or referred to, in a number of recent Board cases (ref. Case Q33,
83 ATC 139, Case Q68,
83 ATC 343, Case Q95,
83 ATC 472, Case R92,
84 ATC 615 and Case S19,
85 ATC 225) and by the Supreme Court of Queensland in
F.C. of T. v. Jenkins 82 ATC 4098, but we repeat them here to point to the similarities and differences that existed in that case and as exists in the instant case.

24. Mr Applegate was a solicitor who was sent to Vila in the New Herbrides in 1971 by his firm to open up a branch office there. Prior to his departure from Sydney, the taxpayer, a young married man, terminated the lease on his flat. He retained no assets in Australia other than membership of a hospital benefits fund. Upon his arrival in the New Hebrides, he was admitted to practise as a solicitor there and obtained a residency permit for 12 months which was later renewed for a period of two years. At about the same time, he leased a house for 12 months with an option for a further 12 months. Except for a brief return to Australia for a holiday, and another brief visit for family reasons, the taxpayer resided continuously at Vila until July 1973 when he became ill and was hospitalised. That illness made it necessary for him to return to Australia. Because it arose from the vagaries of the climate, Mr Applegate was disinclined to return to the New Hebrides. He did so, however, for a brief period from July to September 1973, whereupon he was replaced by another member of his firm and he returned to Sydney. Owing to a fall-off in international business, the branch office at Vila was closed in 1975.

25. As regards the instant case, we consider that some aspects of the overall fact situation are more favourable to M than was the situation in Applegate; on the other hand, it seems to us that some aspects are less favourable. Both were young married professional men, seemingly intent on furthering their respective careers by working for a time overseas. It would seem that M, whilst abroad, did not abandon his ties with Australia to the extent that Mr Applegate did; on the other hand, it could perhaps be said that his relationship with his U.K. place of abode (to use Fisher J.'s expression) was of a more durable kind than was that of Mr Applegate, in that he purchased a residence whilst in London which became his matrimonial home, whereas Mr Applegate was content to obtain a house on a short-term leasing arrangement.

26. By coincidence, both taxpayers worked overseas for the same period of time, viz. 27 months, although Mr Applegate's period terminated through illness whilst M's secondment terminated in accordance with the agreement reached with his employer. Of some materiality is the fact that Mr Applegate went overseas for an indefinite period but in the knowledge that he would one day return to Australia. On the other hand, M travelled to the U.K. to work for a fixed period of 27 months, although it was open to him to work for ``such longer period as mutually agreed upon''.

27. As regards that aspect, we accept M's evidence that he did not intend to return to Australia upon completion of the 27 months' secondment period. In giving his evidence, he told us that he had made two bad career decisions early in his working life and he was anxious to avoid proceeding down culs-de-sac in the future. He considered that the range of experience that he obtained through working in London could not be duplicated in Australia, and it would seem to us that, consistent with that view, he should wish to stay on in the U.K. or take up work in another overseas country in the event of suitable opportunities presenting themselves. Also, as we have seen, he purchased a house in London, which would

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tend to indicate that his place of abode there was not merely transitory. In the result, and in large part due to his wife's wish to return to Australia, he did not accept an offer to stay on with AB in London, or take up another position there, or work with one of his firm's clients in Saudi Arabia, which were all options open to him. As we have seen, he resumed duties with AB in Perth in October of 1981. Within this context, it is of interest to note that, in giving reasons for his decision in Applegate, Fisher J. went to some pains to state that the taxpayer's intention so far as returning to his homeland is concerned was just another factor to consider in examining all the circumstances; it had less significance than a taxpayer's intention in relation to his place of abode outside Australia. Certainly, we would say that M's case involved a greater degree of permanence than was the case in F.C. of T. v. Jenkins, supra, where the taxpayer, a bank officer, was transferred to the New Hebrides for a term of three years but found it necessary to return to Australia after only 18 months because of ill health. A salient fact there was that, although the taxpayer had agreed to go to Vila for three years, he had not given any thought to the possibility of extending his stay beyond that time. The question therefore arose as to whether that aspect, as compared with the fact situation which appertained in Applegate, rendered his stay temporary and prevented his place of abode from being of a permanent nature. Despite that difference, the Court held that Mr Jenkins had a permanent place of abode outside Australia during the period he was overseas, and that was so notwithstanding that he had not at any material time formed an intention to remain indefinitely in the New Hebrides. The learned Judge balked at the notion that a stay out of Australia by a person on transfer for a fixed period (which he designated as of 10 years) was required to be regarded as temporary simply because the limits of his stay were fixed and ascertainable. Accordingly, it was held that the income earned by the taxpayer whilst in Vila did not form part of his assessable income.

28. Mainly because of the fact that M's place of abode whilst overseas consisted for the greater part of the matrimonial home which he purchased in association with his wife, allied with the fact that he was not disposed to stay overseas solely for the basic period of his secondment, we consider that he did have a permanent place of abode outside Australia in the year in issue. Paraphrasing what Northrop J. stated in Applegate, M, at the commencement of the year of income in issue (at which time he had worked in London for some 17 months), had the requisite intention to abandon his place of residence in Australia and to establish a place of residence outside Australia. During the whole of the year in issue he resided outside Australia, and for all but the latter three months of the year of income he lived in London with his wife in their own home. The durability of his association with that place of abode was therefore of the highest order.

29. Accordingly, we are of the view that the Commissioner ought to have been satisfied that, during the relevant period, the taxpayer had a permanent place of abode outside Australia. Hence, M was not a resident of Australia as defined in sec. 6(1), and therefore the income derived by him in the U.K. was not assessable to tax in Australia. Accordingly, we uphold the taxpayer's objection and order that the matter be remitted to the Commissioner to give effect to our decision.

Claim allowed