Australian Tax residency rules: Treasurer Jim Chalmers is getting ready for the “real Budget” in May.
Australian tax residency rules-are you ready for what might be coming on 1 July 2023?
In the 2021-22 Federal Budget (2021-22) the Coalition Government announced current tax residency rules (based on where you “reside” and the Domicile test) would be replaced with new tests (based on a person’s physical presence and connection to Australia). It would be harder to cease residency and just 45 days gets you into a whole new ball game of worldwide AU taxes.
In the first Labour Budget (Tuesday 25th October) no mention was made of the new rules.
On 6th October, 2022 , the Australian Taxation Office "ATO" stepped up to the plate waving their latest baseball bat in the form of Draft Tax Ruling (TR2022/D2) making it clear they are “shoring up their position” to go after Aussies offshore. Professional colleagues consistently advise that the Draft Ruling reflects ATO views from recent Federal Court cases.
For the Australian expatriate in Asia planning to leave their family in Australia and/or make regular trips back to Australia, where are we at with Australian Tax residency rules?
A brief summary
Current tax residency rules (which have the certainty of Federal (Appeals) Court and High Court judgments)
An individual’s Australian tax residency status is determined on a year-by-year basis.
There are currently four tests to determine whether an individual is a tax resident of Australia: the ‘resides’ test, the domicile test, the 183-day test, and the superannuation test.
If one of the four tests is satisfied an individual will be a tax resident of Australia.
The existing residency rules are difficult to apply. Expatriates must navigate concepts such as the meaning of “resides” under the resides test and the meaning of “permanent place of abode” under the domicile test. While the High Court and Federal Court have asserted their right to interpret these terms and pushed back on the ATO’s perennial task of extending its reach and rule the case law, the ATO have gone to the government to prescribe “day tests” to improve and sharpen the focus of ATO residency audits.
The Draft Ruling on tax residency has attracted many commentators.
Quoting from a recent PwC publication, “This draft ruling (issued 6th October, 2022) replaces and consolidates previous tax rulings on the residency status of individuals who are inbound to Australia (Taxation Ruling TR 98/17), or leaving Australia to live overseas temporarily (Taxation Ruling IT 2650). Important to note, this draft ruling does not reflect a change in the existing tax residency rules. Rather, it reframes the Commissioner of Taxation’s view of those rules and how they should be applied to an individual’s facts and circumstances, particularly in light of recent case law developments”.
One can only wonder at the timing of this Draft Ruling (did the ATO know there would be no residency update in the Federal Budget?). While it consolidates two Rulings into one, the ATO can be seen to be "shoring up its position" to ensure its stance on the current rules is foremost in the minds of tax advisers and taxpayers currently offshore.
The Governing Taxation body,” the Board of Taxation has acknowledged that the current residency rules do not reflect global work practices and impose an inappropriate compliance burden on many taxpayers in all but the simplest of cases – this has led to increased uncertainty and disputes. This draft ruling attempts to provide greater certainty to taxpayers”.
But, quoting from the immortal words of Christine Keeler "they would say that, wouldn't they".
In detail
The draft ruling retains the six-month rule of thumb for inbound individuals when considering whether they reside in Australia, and the two-year rule of thumb for outbound individuals when considering whether they have a permanent place of abode outside Australia. However, even in these cases, there must still be a careful consideration of the facts and circumstances.
The ATO notes that each residency decision turns on its facts. While Court and Tribunal decisions provide illustrations of how the Court or Tribunal has considered and weighted facts, an outcome in one case does not govern the outcome in a different case, even where the facts are similar.
In light of the Harding decision, the ATO has updated its discussion regarding the application of the permanent place of abode test to acknowledge the Court’s definition of ‘place of abode’ beyond a bricks and mortar dwelling to a town or city.
The Harding case concerned an individual who moved between apartments in a building in Bahrain in a regular pattern, while he was based in the Middle East. One of the examples in the draft ruling seeks to illustrate the application of the expanded definition of ‘place of abode’ by referring to an individual who moves between apartments and through various countries to take up short-term employment opportunities. The ATO’s conclusion in that example is that the individual has not established a permanent place of abode outside of Australia and would be a tax resident. But that has always been the case. In moving to each new country or location, the taxpayer must again satisfy the ATO they have established a new 'permanent place of abode' by residing there for a "substantial period of time".
"Permanent in this context is to be contrasted with "temporary".
There is also further guidance around complicated outbound residency cases. These outbound cases typically involve situations where an individual retains some ties remaining in Australia, such as continued family connections or maintaining assets in Australia (such as a house or furniture) and have caused the most uncertainty for taxpayers because the outcomes are dependent on the facts of the particular case.
The ATO gives the example of an individual who moves overseas, but their family will follow six months later when the children finish the school year. In the example, the individual could become a non-resident of Australia, as their remaining connections of Australia are remnants of prior residency and are not consistent with ongoing residency.
Proposed new individual residency tests (per the 2021/22 Federal Budget)
The proposed residency tests are based on a two-step model: a simple 183 day-count test as the primary test of residency, followed by more complex 45-day secondary tests if the individual is not a resident under the primary test (focusing on the person’s connection to Australia).
The proposed primary test of residency is a 183-day test; an individual will be a tax resident if they are physically present in Australia for more than 183 days in an income year or a non-resident if not physically present for less than 45 days.
This is a simple test to apply, and it is clear when an individual will be a resident under this test, and whether the secondary tests are to be considered.
The secondary tests are based on four objective Australia-only factors: the right to reside permanently in Australia (citizens including NZ citizens and PR status), Australian accommodation, Australian family, and Australian economic interests. Taxpayers are only required to satisfy two factors to determine their residency status. Furthermore, the focus is on Australian connections. Note well the ATO litigated the current rules (which were all questions of fact) in the Superior Courts starting in 1937 (Gregory's case) to 2019 (Harding's case) before running off to the Government to change the rules. These four tests are also questions of fact. One must ask the question of how many more years will it be before the Superior Courts again rein in any excesses of the ATO in pursuing Australians offshore. Better the rules you know currently (sanctioned by the High Court) OR do you fancy having your residency determined by a Clerk in the ATO?
Do you have family back in Australia?
Case law on residency has never been in the ATO's favour and there are two common themes in many cases of first, family back in Australia and taxpayers residing in countries that do not have a Double Tax Agreement. There is no incentive for the ATO to go after Australians residing in DTA countries as the DTAs typically exempt remuneration from Australian tax. These proposed rules are aimed at the Middle East and Hong Kong (both being nil tax/low tax jurisdictions with no DTAs. To a lesser extent all you Kiwis out there living in Auckland in the Summer months and moving to the Gold Coast for the cooler months, once you are here 45 days, the game is up (and yes, I know you can still get “temp res” concessions).
So where are we now?
It remains to be seen whether the current Government will continue with the previous Government’s proposals to replace the current tax residency rules with “day tests” as proposed by the Board of Taxation.
In the meantime, there is no “bright-line” test for determining an individual’s tax residency which the Commissioner of Taxation has reiterated in the draft ruling.
Regards,
Dale Hoy
Email dalehoy@interretire.com
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