Changes to individual tax residency rules earmarked

As part of the 2021/22 Federal Budget handed down earlier in May 2021, the Federal Government announced that it intends to accept the proposed changes to the tax residency rules for individuals as recommended by the Board of Taxation in its report of 2019.

In its report of 2019, the Board of Taxation determined that the current tax residency rules for individuals are outdated, do not reflect the current mobility of individuals and their work commitments, and often lead to unclear outcomes of whether an individual should be treated as a tax resident of Australia or a non-resident of Australia.

While the Federal Government announced that it would adopt the Board of Taxation’s recommended changes to the tax residency rules for individual, it is important to note that the legislation outlining the changes has not yet been released and could still contain differences to the Board of Taxation’s announcements.

We detail below a summary of the current tax residency rules for individuals and the proposals announced by the Board of Taxation:

The current tax residency regime for individuals

The current tax residency regime for individuals contains 4 separate tests.  If an individual satisfies any of the 4 tests, they will be treated as a tax resident of Australia for the year.

The 4 tests are:

Test Narration
Ordinarily resides test The ordinarily resides test is a subjective test that considers various factors which are relevant to where an individual is considered to reside during the year.  Relevant factors include:

  • The intention and purpose behind the physical presence of the individual.
  • The location of the family of the individual.
  • The location of the assets of the individual.
  • The social and living arrangements of the individual.
183 day test The 183 days test assesses the residency of an individual in Australia based on whether they have spent at least 183 days in Australia during the financial year unless the individual otherwise has a “usual place of abode” outside of Australia.
Domicile test The domicile test assesses the tax residency of an individual based on their domical (which is basically the location of their permanent home and usually determined (at least initially) by the location of the permanent home of their parents) unless the individual has established a permanent place of abode outside of Australia.
Government superannuation fund test Even if the individual does not satisfy the tests of residency based on the ordinarily resides test, the 183 days test or the domicile test, the individual can still be classified as a tax resident of Australia if they are a member of a Government Superannuation Fund.

The proposed tax residency regime outlined by the Board of Taxation

The Board of Taxation has recommended to change the above tax residency regime with a regime that is more objective and reflective of the mobility of individuals in modern life.  The new rules will focus less on definitions of ‘ordinarily resides’ which has become very subjective and will instead focus on objective factors to determine residency.

Under the new rules, the starting test will always be the 183-day test.  Under the 183-day test, the individual will be treated as a tax resident if they have physically been based in Australia for at least 183 days in a particular financial year.  If an individual is based in Australia for 183 days or more in a particular financial year, then (i) if they are arriving to Australia, they will be treated as a tax resident of Australia from the date of their arrival into Australia; and (ii) if they are departing Australia, they will be treated as a tax resident of Australia for the whole of the financial year.

Where an individual is not physically present in Australia for 183 days or more for the financial year, a separate set of tax residency rules will be introduced depending on whether the individual is arriving to Australia or departing from Australia in the year.

Arriving to Australia

If the individual was physically present in Australia for at least 45 days during the financial year and satisfies at least 2 of the various objective factors outlined below, they will be classified as a tax resident of Australia from the date they arrival to Australia.

The objective factors are:

Objective factor 1 – the individual has a right to permanently reside in Australia (by way of citizenship or by visa).

Objective factor 2 – the individual has the right or ability to access accommodation in Australia either in the form of premises that they own, that they lease or otherwise have access to during the financial year.

Objective factor 3 – the individual has a spouse or dependent children based in Australia during the financial year.

Objective factor 4 – the individual has Australian economic interests such as being employed in Australia, actively carrying on business operations in Australia or otherwise having business interests in Australia.

If the individual was physically present in Australia for at least 45 days during the financial year and satisfies at least 2 of the above 4 objective tests, they will be treated as a tax resident of Australia from the date they arrive to Australia.

Departing from Australia

For individuals departing Australia, the residency tests differ depending on whether the individual has previously been a short-term resident of Australia (a resident of Australia for less than 3 consecutive years) or a long-term resident of Australia (a tax resident of Australia for at least 3 consecutive years).

For short term residents of Australia, the individual will cease to be treated as a resident of Australia if they have been physically present in Australia for less than 45 days in the current year and do not satisfy at least 2 of the 4 above objective factors outlined above.  If a short-term resident individual is treated as a non-resident of Australia for the year, they will be a non-resident from the date of their departure from Australia.

For long term residents of Australia, the individual will cease to be treated as a resident of Australia if they have been physically present in Australia for less than 45 days in each of the current financial year and the last 2 financial years.  For long term residents of Australia, the objective factor tests are not separately considered to determine residency.  If a long-term resident individual is treated as a non-resident of Australia for the year, they will be treated as a non-resident of Australia for the full financial year.

A separate rule will be introduced for those individuals that depart Australia to work for an overseas employer.  Under the rule, an individual will be treated as a non-resident of Australia from the date they depart Australia if they have previously been a tax resident of Australia for at least the prior 3 years (i.e. they are classified as a long-term resident), undertake employment overseas that is mandated for a period of at least 2 years, have accommodation available to them during their employment overseas and return to Australia for less than 45 days in each of the income years they are based overseas.

Concluding comments

In the Federal Budget earlier this month, the Federal Government announced that they intended to adopt the Board of Taxation’s recommendations relating to residency of individuals.

Under the proposed new residency rules outlined by the Board of Taxation, day counts will become extremely important for determining tax residency.  If an individual is physically based in Australia for at least 183 days in a financial year, they will always be a tax resident of Australia for the year.  If the individual is physically based in Australia for less than 183 days in a financial year, the secondary residency tests need to be considered depending on whether the individual is entering Australia or departing Australia.

As is currently the case, even where an individual is treated as a tax resident of Australia under our domestic tax legislation, it is possible that the position can be overruled by way of the application of Double Tax Agreements which seek to conclude tax residency positions where an individual would otherwise be treated as a tax resident of more than one country.

At this stage, the commencement date of the new tax residency regime is unknown at the Federal Budget announcement in the budget stated that the new measures will only apply from when the new legislation is passed.

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