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Moore Australia welcomes clarity in tax residency rules

Treasury commences consultation on reforms of tax residency rules for individuals

Moore Australia

The Australian Government has commenced consultations to modernise the individual tax residency framework based on recommendations made by the Board of Taxation (BOT) in its 2019 report Individual Tax Residency Rules – a model for modernisation. 
Under the current rules, a person is considered a tax resident of Australia if they must pass
  • the Ordinary concepts test or
  • the Domicile test or
  • the 183- test or
  • the Commonwealth superannuation fund test.
You need only pass one of the four tests to be considered a tax resident of Australia.
The current residency provisions are principle based and generally require a detailed analysis of current case law which often leads to confusion and incorrect application of the tests.

The proposed model
In order to modernise and simplify the residency provisions, the Government proposed to introduce a ‘ bright line’ test. If a person satisfies this test, they will be considered a tax resident of Australia. If an individual does not meet the primary test, they will need to apply the secondary tests to determine their residency status.
The key features of the BOT’s model is to ensure the residency tests are simple, provide more certainty and make it more difficult for an individual to sever their Australian residency status if they maintain sufficient connections to Australia.

Bright Line Test
The BOT recommended the implementation of a “bright line” test as the primary test for residency, and if an individual spends 183 days or more in Australia, they will be considered a tax resident of Australia. There is no need to consider secondary factors such as family & economic connections to Australia.
 
Our thoughts
This is a welcome change and by introducing this as the primary test of residency, it will simplify assessment of tax residency. However, this may bring some non-residents under current rules within the Australian tax net, for example workers who are present in Australia for 183 days or more but would ordinary not be considered Australian tax residents as their usual place of abode is overseas and they have no intention of taking up residence in Australia.

Secondary tests
If a person fails the bright line test, they may still be considered tax residents if they pass the secondary tests which are based on objective factors and the number of days an individual spends in Australia. This test differs dependent on whether the person is commencing or ceasing to be a tax resident of Australia.
  • Commencing residency – If an individual was not previously a tax resident of Australia, they would be considered a tax resident if they:
    • Spend more than 45 days in Australia; and
    • Satisfy two or more of the following factors:
      • Right to reside permanent in Australia - Australian citizens and permanent residents would satisfy this factor.
      • Australian accommodation – legal right or arrangement to access residential accommodation. This would exclude accommodation rented out for the entire income year and situations where an individual lives with their relatives whilst visiting Australia for short periods of time.
      • Australian family – An individual would satisfy this factor if their spouse or children below the age of 18 lived in Australia during the income year.
      • Australian economic interest – An individual would meet this factor if they commonly carried out their employment duties in Australia, actively participate in a business in Australia and have director or indirect interest in Australia assets such as property, bank accounts with significant balances, interests in a family trust or if they received Australia social security payments in the previous income year.
Our thoughts
It is now commonplace for business migrants coming to Australia to relocate in stages, with their family members, including children and/or spouse transitioning to Australia at differing times.
Under the BOT model, if the individual has spent more than 45 days in Australia visiting their family, they would be considered a tax resident on the basis that they have a right to reside (eg. if they have a permanent resident visa) and family based in Australia.

Careful planning will be required to ensure individuals do not inadvertently trigger commencement of Australian residency prior to original intention, which may bring foreign assets and/or entities within the scope of Australian tax.
 
  • Ceasing residency – If an individual was previously a tax resident of Australia, they will need to determine if they have ceased to be tax residents.
    • Overseas employment rules – An individual would be considered non-resident if they are generally employed overseas for more than 2 years, have accommodation available overseas for the entire period and spend less than 45 days in Australia.
    • Ceasing short- term residency – Individuals who have been residents for less than three years can cease residency if they spend less than 45 days in Australia and satisfy less than 2-factors (mentioned above).
  • Ceasing long- term residency – individuals who have been residents for more than three years will only be considered non-residents if they spent less than 45 days in Australia during the income year and in each of the two preceding income years.
Our thoughts
There will be greater difficulty in “drawing a line in the sand” and ceasing Australian residency from the date of departure – the BOT’s recommended model ensures the residency status change is a more gradual process.

This was one of the principles in the BOT’s model and once an individual has spent sufficient time in Australia and made enough connections to become a tax resident, it is appropriate for the individual to remain a tax resident until those connections are scaled back to such an extent that they no longer benefit from their connection to Australia to justify being taxed as a resident.

This model brings Australia’s proposed regime in line with other jurisdictions such as the United Kingdom.

 
Dual tax residents
Under the BOT model, it was proposed to tax certain dual tax residents (tax residents of two countries) as non-residents in Australia if they were considered tax residents under the tax treaty tie breaker provisions of another country. This would mean they would have lost access to certain concessions (e.g., 50% CGT discount, main residence, tax free threshold). The Government is not planning on adopting this proposal at this stage.

In conclusion
It is important to note that the above is not law and this model does not change the way Australia seeks to tax residents (on a worldwide basis), non-residents (on Australian sourced income) and temporary residents on short term bisas (Australia sourced income and certain foreign employment income).

The Government also acknowledged that there is a need for transitional rules and this is one of the areas where there has been little guidance provided and will hopefully be resolved through consultation.

We await the outcomes of the consultation process and hope to see a model that reduces complexity and uncertainty in this area of Australian tax law.

If you have any questions on the current and/or proposed rules, contact your Moore Australia advisor for further information.
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