The Australian Taxation Office (ATO) has released draft taxation ruling (TR) 2022/D2 which provides the Commissioner’s views on how the tax residency tests should be applied when determining if an individual is a tax resident of Australia.
Please note that this draft ruling has not been released as a result of a change to existing tax residency rules, rather the new ruling takes into account recent decisions handed down by the courts and replaces some previous rulings from the 1990s.
A person is considered a tax resident of Australia if they pass the Ordinary concepts test or the Domicile test or the 183- test or the Commonwealth superannuation fund test. You only need to pass one of the four tests to be considered a tax resident of Australia.
Ordinary concepts test
This test considers whether an individual resides in Australia under the ordinary meaning of the word resides which is a question of fact. This test considers the dictionary meaning of “reside” which is ‘to dwell permanently or for a considerable time, to have one's settled or usual abode, to live, in or at a particular place'.
In determining whether a person ordinarily resides in Australia, you are required to consider certain factors including the period of physical presence in Australia, intention or purpose of presence, behaviour whilst in Australia, family/business or employment ties, location of assets and social and living arrangements. No one factor in isolation is determinative and you need to consider all the factors together in determining your residency status.
If a person passes this test, they are automatically tax residents of Australia, and it is not necessary to consider any of the other tests. Common misconceptions when applying this test include:
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Treating yourself as a non-resident of Australia on the basis that you are a tax resident of another country. It is possible to reside in two countries and be considered tax residents of two countries at the same time. Further considerations will need to be given to the double tax agreements (if any) between the two countries.
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Treating yourself as a non-resident on the basis that you do not spend a lot of time in Australia. If you have the necessary connections in Australia such as family and assets, you could still be resident under this test, even if you only return to Australia for short-term visits and are physically only present in Australia for the holidays.
This example is provided in the ruling:
Example:
Mark, an Australian-resident employee of a mining company, is transferred overseas to Brazil for a temporary work assignment for a period of two years and intends to return to Australia at the end of that period. The purpose of the assignment is for Mark to gain wider work experience. Mark is initially accompanied by his wife and children, but they return to the family home in Australia so the children can continue their schooling. Mark spends his annual holiday in Australia with his family and friends. He also returns for short periods to celebrate family birthdays and other milestone events. During his absence from Australia, he stays in a serviced apartment provided by his employer, maintains bank accounts in Australia and continues to contribute to his Australian superannuation. He makes no investments in the overseas country and remits all money in excess of living requirements to Australia for his family to use or for investment.
Mark is considered to be a resident of Australia under the ordinary concepts test as he has maintained a connection with Australia consistent with residing here, albeit being absent for a substantial period. |
Example:
Michael is a South African orchestral conductor. He takes up the opportunity of a 12-month contract with a professional orchestra in Adelaide. Michael's wife and children do not accompany him to Australia but stay at the family home in South Africa. Michael brings his clothes, personal effects and a keyboard with him to Adelaide. While in Australia, Michael enters into a 12-month tenancy of a townhouse in the city. He spends his days rehearsing with the orchestra and going to the gym, and weekends performing concerts and playing the organ at a local church. His wife and children visit him over Christmas, and they go on a short holiday to a beachside town. At the end of the 12 months, Michael returns to his family home in South Africa as he intended.
Michael exhibits behaviour that is consistent with residing here. He establishes a connection to Australia during his 12 months in Adelaide. His accommodation arrangements, work, social and sporting commitments demonstrate he resides in Australia according to the ordinary concepts test, despite the fact that his wife and children stay in South Africa. |
Domicile test
A person is a tax resident of Australia if their domicile is Australia unless they can show their permanent place of abode is outside Australia. This test requires consideration of the three separate types of domicile:
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Domicile of origin which is acquired at birth.
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Domicile of choice which is where a person voluntarily chooses to make another country their home indefinitely. For example, a person migrating on a permanent visa overseas with the intention of making that country their home indefinitely.
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Domicile of dependence which applies to minors.
If a person is domiciled in Australia, they could be considered tax residents of Australia unless they can show their permanent place of abode is elsewhere. The purpose of this test is to capture Australians living overseas who may not “reside” under the ordinary meaning but have not done enough overseas to show they have abandoned their residency in Australia. You are required to consider the length of a person’s overseas stay, the nature of their accommodation and their durability of association with the foreign country when determining if someone has made another country their permanent place of abode.
As a rule of thumb, the ruling considers two years to be a substantial length of overseas stay. In relation to type of accommodation, you do not need to live in a particular house or apartment, but you must be able to show that you have made a particular town or country your permanent place of abode. Transient type of accommodation including hotels, barracks and camp sites would not be considered permanent for the purposes of applying this test.
183- day test
A person is a tax resident of Australia if they spend 183 days or more in Australia, unless you can show that you have no intention of taking up residency in Australia, and your usual place of abode is elsewhere. The ruling clarifies the meaning usual place of abode and states “it is not necessary for a person, while in Australia, to have and maintain a physical dwelling overseas in order for their usual place of abode to be outside Australia. For example, if you rented accommodation overseas and terminated your rental agreement before coming to Australia, but you intend to return to the same town or country after your stay in Australia, your usual place of abode is likely to be outside Australia.”
Relevant factors in considering whether an individual’s usual place of abode is outside Australia include:
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where they lived before and after their time in Australia;
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the availability of an overseas dwelling whilst present in Australia;
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where their possessions and assets are;
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the type of visa and the length of your intended stay;
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the purpose of coming to Australia; and
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travel arrangements made, including whether they departed from and returned to the same place of abode outside Australia.
Changes in the pipeline
There are also changes in the pipeline to be aware of – the previous Government had announced changes to the rules in determining whether a person is a tax resident of Australia. At this stage, no legislation has been passed but for a better idea of where we may be heading, refer to our article here.
More information
The application of the tax residency rules can be complex and is highly fact dependent. If you have any queries in relation to tax residency, contact your Moore Australia advisor for more information.