Recently, the Israeli Tax Authority noted it is considering making legislative changes in the area of residency rules for individuals, in particular and in the field of international taxation, in general. In this regard, it is interesting to note Australian judgment Hardening v. Federal Commissioner of Taxation (issued in February 2019). Recently, the Australian Tax Authority announced that it would not appeal to the Australian Supreme Court after the taxpayer's position was approved.
Under the ITA's new proposal in circumstances where the spouse is a resident of Israel and the husband is in Israel for 90 days or more each year, the family unit split will not be recognized for fiscal purposes, i.e. the husband will be classified as an Israeli resident. In our opinion, this constitutes a violation of the Sapir case issued by the Israeli Supreme court in May 2014, which recognized even in circumstances where the husband stayed longer periods in Israel (reaching 185 days in one year and staying an average of 160 days in Israel). The ITA, through legislation, wants to overturn a Supreme court judgment stating that business interests override personal interests similar to other judgments also given worldwide (most recently in Australia).
The Harding judgment dealt with an Australian citizen, married with children who received a job offer from a British company stating that he will be stationed in the Middle East. The husband left Australia in 2009, with his personal belongings intending to work and live in the Middle East permanently or alternatively, indefinitely. According to the couple's original plan, the wife and children should have joined him, after graduation of the son and the family planned living together in Bahrain in a large house they would have purchased upon their arrival. In practice, at first the husband lived in a furnished apartment he rented in Bahrain while the wife and children continued to live in the family's home in Australia, a home built by the couple. Later on, despite their plans, the wife refused to join her husband in the Middle East and this led to a breakup in their marriage and later on to a divorce.
The husband later on replaced the rented apartment in a smaller one, in the same complex in Bahrain and even knew another woman. During that time he continued to stay in Bahrain and hold half of the rights in the family's home in Australia. The issue of the husband's fiscal residence was discussed in the year 2011, while the couple was still married. During this year, the husband spent more than 91 days in Australia, in the family home, visiting his wife and children while trying to persuade them to stick to their original plans and move in with him in Bahrain (later the husband moved to Amman).
The Australian court made a distinction between two concepts. One, "place of abode" and the other, "permanent home." As regards "place of abode," the court ruled that it did not refer to a specific house but also to a city or state, while the court explained that if the legislature intention was to specific dwellings, he would have explicitly stated this using the term "permanent home". The court also added that the word "place" in the context of 'outside of Australia, refers to the weighing of a city or country where a person physically resides, permanently'. With regard to the split of the family unit, the court ruled that the husband left Australia in 2009 with no intention of returning but with the expectation that his wife and children will join him. This is the basis for his departure. However, evidence presented to the court did not indicate that the husband's change of residency was conditioned on his wife and children joining him. The evidence also showed that the husband did not propose to return to Australia as a result of his wife's refusal to join him, but that he rather acted to continue his life in the Middle East, in one country or another, and regardless of his family's place of living. The court ruled that in the year in question the husband was not an Australian resident.
It should be noted that the Australian judgment joins other global case law recognizing the family unit split for tax purposes (Luxembourg, France, Canada, Portugal, USA and New Zealand). The global case law further illustrates that the ITA's proposal to reduce recognition of the family unit does not only contradicts existing judgment ruling of the Israeli Supreme Court, but even contradicts worldwide case law that recognizes family unit split for fiscal purposes.
* International Tax Partner, Ziv Sharon & Co. Law Office. Formerly, Mr. Frenekl worked as a tax specialist in the International Tax Division, Israel Tax Authority.
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