Tax residency has long been an area of confusion for people entering and departing Australia, even more so since the increase in global mobility in the modern working environment.
Australia’s tax residency rules have remained unchanged since 1936, and most residency cases now rely heavily on case law to guide determinations. This situation was made more complex with the restriction of the foreign services exemption from 1 July 2009, which provided a tax exemption for foreign service income where the foreign service period exceeded 91 days. Prior to 2009 the question of tax residency was not so important where the individual’s foreign income was mainly from the foreign service.
The current rules to determine residency comprise of four tests that depend not solely on time spent in Australia, but the nature and substance of the individual’s connections to Australia.
1. The resides test
This a rather subjective test that takes into account a holistic review of the individual’s circumstances and gives weight to various factors such as:
2. The domicile test
If the individual does not ‘reside’ in Australia according to the first test, but is nonetheless domiciled in Australia e.g. domicile of origin (usually the place the person’s father has his permanent home) or their domicile of choice, they are still considered a resident of Australia for tax purposes unless their ‘permanent place of abode’ is outside of Australia.
3. The 183-day test
An individual is assumed to be a tax resident if they are physically present in Australia for 183 days or more and their ‘usual place of abode’ is not outside of Australia.
4. The superannuation test
An individual is an Australian resident if they are a member of certain Government public service superannuation funds. The test also extends to treat the spouse and children under 16 as residents.
The current rules often prove difficult to navigate and the contradictory judgements in the AAT and courts provides inconsistent guidance as to what factors should be given more weight than others. Recent case law has also placed significant emphasis on the concept of ‘permanent place of abode’ and has thrown doubt on situations that most would previously have considered fairly straight forward.
The Board of Taxation in Australia has made suggestions to the Government to overhaul the old rules in favour of a less complex system. Simplification will improve certainty, reduce compliance costs and remove a potential barrier from Australia’s attractiveness as an investment location.
1. Primary test
This test will automatically determine the residency status of the majority of individuals. The test is designed to provide a bright-line for individuals to be able to conclusively determine their residency status, based on time spent in Australia. The day-count system will likely differ depending on whether the individual is inbound or outbound.
The Board’s preferred model is as follows:
|Previously a resident of Australia
|An individual that was previously a resident of Australia is a non-resident if they spend less than X number of days in Australia in any 12-month period.
|Previously not a resident of Australia
|An individual that has never been a resident of Australia is a non-resident if they spend less than Y number of days in Australia in any 12-month period (where Y is greater than the X number of days required for those previously a resident).
|An individual that works full-time overseas is a non-resident if they spend less than a certain number of days working, or a larger number of days in total, in Australia in any 12-month period.
2. Secondary test
This test will be used for more complex situations and will take into account the individual circumstances. It may also apply differently to inbound and outbound individuals. The proposed test will have a clearer weighting system for the relevant factors to ensure greater certainty in determining residency than under the current rules.
The Board considered the following factors crucial to determining residency:
|Time spent in Australia
|This factor is satisfied if a certain amount of time is spent in Australia, as per the primary test.
|The factor is satisfied if the individual is an Australian or permanent resident.
|This factor is satisfied if the individual’s family is largely located in Australia.
|This factor is satisfied if the individual has readily accessible accommodation (rented or owned) that they use regularly.
|This factor is satisfied if the individual has substantial economic ties to Australia, such as employment, business interests, assets etc.
The Board has proposed that:
The Board has looked at other residency systems around the world, including the OECD standards, in designing the proposed new rules.
They have also addressed potential concerns regarding a person being a ‘resident of nowhere’ and are considering only allowing the change in status from resident to non-resident if the individual can demonstrate that they have established residency elsewhere.
If the proposed residency rules are legislated, it is intended that there will be clear outcomes for the majority of individuals, and a structured process to determine the more complex cases, resulting in a decreased need to apply for private rulings.
Public comments were invited during September – October 2018, after which the Government will consider the Board’s recommendations. BDO Australia will provide an update if any changes to the rules are legislated.
Eng Hua Ng