The Australian Federal Budget in May 2021 picked up the thorny issue of the tax residency of individuals in Australia, and we expect changes to the tax residency rules in Australia in the near future.
A lot has changed in terms of global mobility and the ability of individuals to move and work internationally since the current residency provisions were made law over 80 years ago.
In May 2016 Australia’s Board of Taxation initiated a review of the current individual tax residency provisions and presented its findings to the Federal Government in its report Review of the Income Tax Residency Rules for Individuals.
The Board found that the residency rules should be brought into the modern era, having regard to the following principles, in that they should:
- Reflect current global work practices;
- Provide certainty to individuals of their tax residency status;
- Be capable of being applied by an ordinary individual without tax advice in all but the most complex of cases;
- Remove antiquated concepts such as domicile; and
- Adopt factors that are easy to understand, reduce reliance on common law definitions, and are less open to manipulation.
Further, the Board’s recommended that the current definition of resident should be replaced:
- There should be a policy statement, such as an objects clause, that outlines the Government’s overarching individual tax residency policy addressing the tax policy objectives of equity, efficiency, simplicity and integrity;
- In accordance with the policy statement, the new resident definition should include separate definitions for individuals establishing residency, and ceasing residency:
- Each definition should commence with a simple bright line “days count” test that ensures the vast majority of individuals can determine their residency quickly and with certainty;
- For individuals that do not satisfy either of the bright line tests an objective test based on the individual’s facts and circumstances should then apply to determine residency on the basis of specific key factors (to determine the individual’s connection or relationship to Australia);
- A rule should be adopted to the effect that Australian residency is maintained until tax residency is provably established in another jurisdiction, to address integrity concerns identified during consultation – namely to avoid individuals not being tax resident in any jurisdiction;
- The current rule that seeks to deem Government officials and their families resident no longer captures many Government officials and, as such, any new definition should include a more effective rule that reflects the Government’s position regarding public servants (such as a specific government services rule).
After a period of consultation the Board has proposed that the following tests of residency be introduced:
- Physically present in Australia for more than 183 days in a tax year = resident in Australia.
- Government official deployed overseas on foreign service = resident in Australia
- For those arriving in Australia, in Australia for more than 45 days but less than 183 days during a tax year = 2 from the following 4 means resident in Australia:
- The right to reside permanently in Australia, eg as an Australian citizen, or as permanent visa holder;
- The ability to access accommodation in Australia eg ownership of property, a leasehold interest, a license to occupy;
- The individual taxpayer’s family (spouse/partner or any children under 18) generally located in Australia;
- The individual’s Australian economic connections eg employment, carrying on a business, other interests in Australia.
For those departing Australia, if the taxpayer was an Australian resident in a previous income year and fails the 183-days in Australia test in the current income tax year, s/he will then need to consider some additional days based tests along with the objective factors listed above to check whether they have ceased Australian residency.
More specifically, an individual who has previously been a resident of Australia and moves overseas for employment will cease to be a resident under the proposed “overseas employment rule” if s/he:
- Has been residing in Australia for the prior 3 income years; and
- Will be employed overseas for at least 2 years; and
- Has accommodation at the overseas employment location for the entire employment period; and,
- Spends less than 45 days in Australia in each tax year during the employment period.
Planning point: Should these provisions become law it will clearly be best for those working in no tax/low tax jurisdictions to avoid spending less than 45 days in Australia during each tax year.
This is subject to the provisions of any applicable Tax Treaty between Australia and the jurisdiction in which the individual is working – such a Treaty may find the individual is Treaty resident in the other jurisdiction, which could override the domestic residency provisions in Australia.
In the context of temporary residents (as defined – broadly, those who are residing in Australia as the holders of a temporary residency visa, see also here), the Board considered, ” … that it is inappropriate for any person on a temporary visa to live and work in Australia for more than four years and not to be taxed in the same manner as permanent residents. The Board is of the view that this inconsistency be removed, with a time limit (for example, a four-year cap) to be put on any individual being classified as a temporary resident.”
Commencement of New Residency Rules
The new Australian individual tax residency rules are proposed to apply from the 1st of July following the passing of the enabling legislation.
It is expected that draft legislation will be made available for comment before proceeding through the Australian Federal Parliament.
Given this – and an expected Federal Election in the next few months – we believe that the new residency rules will not apply until the 1st of July, 2023 at the earliest.
bdh Tax is a boutique firm of tax accountants that advises individuals who are moving to Australia, or who are departing Australia to live and work overseas.
Our clients include individuals who are departing Australia to work in low tax/no tax jurisdictions and who seek comfort as to the taxation of their income.
We also advise employers with international operations who require guidance on how their employees will be taxed when departing Australia to work in other countries.
If you would like guidance on how your income will be taxed when you are arriving in/departing from Australia – or you have an employee who will be departing Australia to live and work for you in another jurisdiction – please complete the enquiry form on this web page.
We will be pleased to have an initial free conversation with you.