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Current issues and changes to individual tax residency rules

13 December 2021

#Taxation

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Current issues and changes to individual tax residency rules

In November, I had the privilege of presenting for the Tax Institute on current issues in individual tax residency – an issue that is again coming to the fore as the world begins to reopen. The discussion broadly covered three areas:

  • the current tax residency rules and recent case law on the same
  • ATO guidance on administration for COVID-19 impacted periods
  • what the future rules, announced in the 2020/21 budget and likely to come into effect in the 2022 income year, may look like.

The challenges

Residency is a threshold test for whether an individual has income assessable in a particular jurisdiction and to what extent. Getting residency wrong can have significant consequences that impact tax rates, assessable classes of income, available tax concessions and offsets, and even amendment periods where the error can lead to not reporting any income in the appropriate jurisdiction.

Yet, determining residency status with certainty can be challenging.

The holistic analysis required under the existing tests, case law and principles that are not in touch with modern practices makes the provisions complex and subject to dispute. Globalisation, and more recently, COVID-19 travel restrictions, have only served to increase that complexity. Therefore, the 2021 budget proposed reforming the domestic individual residency rules to refocus on physical presence, Australian connections and objective criteria. The proposed replacement tests are expected to come into effect for the 2022 and subsequent income years.

Current tests

Under the current tests, if an individual passes any one of four tests, they are considered a resident of Australia for income tax purposes. These tests include:

  • residence according to ordinary concepts
  • domicile and place of abode test
  • the 183-day presumption test
  • the Commonwealth superannuation fund test.

There are also double tax agreement tiebreaker tests for individuals that are residents of more than one country. These tests and recent case law concerning their application, including Harding [1], Pike [2] and Addy [3], were discussed during the presentation. Some of the key learnings and issues to be aware of are:

  • the holistic analysis required and the need to consider both quality of presence and intent for presence means an in-depth factual enquiry is necessary and that different conclusions can be reached on very similar fact patterns
  • the way in which the courts apply the tests has changed over time to adapt to changes in how we live and work. As such, lesser weight ought to be attached to past decisions that are no longer aligned with those practices – such as cases that place significant emphasis on where assets are owned
  • that there are aspects of the tests that rely on the Commissioner’s state of satisfaction and which can be taken not to be met in the absence of the Commissioner directly turning his mind to the issue. Strategic consideration is therefore required as to how to deal with this at the assessment, objection and litigation phase
  • a place of abode for the domicile and place of abode test can be a town or country – it does not need to be a specific apartment or house (this has been a contentious one for a while). 

COVID-19 administration

The ATO has issued guidance on how it will administer residency for the 2020 and 2021 income years in light of COVID-19. Currently, the most important aspect of that guidance to be aware of is that individuals who initially stayed in Australia because they were stuck here due to travel restrictions will most likely be treated as Australian residents for tax purposes if they choose to stay here after the borders reopen. Factual inquiry will be required in such circumstances to determine when the intent changed and, therefore, from what date they should be treated as an Australian tax resident.

Proposed new tests

As part of the 2021/2022 budget, the government announced it would replace Australia’s individual tax residency rules with a new framework based on a Board of Taxation review. Draft legislation is yet to be released, but the tests are proposed to be in alignment with what the Board of Tax recommended, which is a two-stage approach with different tests for commencing and ceasing residency, and some special case tests for government officials and individuals moving overseas for employment purposes.

The proposed stage one test (being the primary test) is based on physical presence in Australia and will be a ‘bright line test’ – that is, a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident.

The other stage one test is a special case for government officials and provides that such individuals are Australian tax residents.

Individuals who do not meet the stage one tests will be subject to stage two tests. These tests differ depending on whether they were Australian resident or not in the previous year, and make it more difficult to cease residency the longer an individual has been a tax resident in a particular location. Broadly, the stage two tests are:

  • commencing residency: The individual must spend 45 days or more in Australia during the income year and satisfy the factor test
  • ceasing short term residency: The individual must spend less than 45 days in the current income year in Australia and satisfy the factor test
  • ceasing long-term residency: The individual must spend less than 45 days in the current income year in Australia and less than 45 days in Australia in each of the two preceding income years
  • special case – overseas employment: Individuals that have been Australian residents for at least three consecutive years immediately before commencing an overseas assignment to become non-resident if they also meet the following conditions:
    • being employed overseas with an employment period of over two years
    • having accommodation available in the place of employment for the entire employment period
    • spending less than 45 days in Australia in each income year of the employment period.

The factor test component (mentioned above) is only based on Australian connections, which is a significant departure from the current tests based on all worldwide connections and a weighting exercise. This change will likely result in the double tax agreement tiebreaker tests becoming relevant more frequently.

The factors to be considered are also narrower than those of relevance under current tests, broadly being limited to the right to reside in Australia permanently, Australian accommodation, family in Australia and Australian economic interests.

This is in part a ‘watch and see’ space with more clarity on the detail expected once exposure draft legislation is released – but understanding the likely direction could be important to those currently considering a move.

If you have any questions about your tax residency status, please speak to us or contact us here.

Author: Megan Bishop

[1] Harding v FCT [2019] FCAFC 29
[2] FCT V Pike [2020] FCAFC 158 
[3] Addy v Commissioner of Taxation [2021] HCA 34

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

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