Board of Taxation Recommendations on Tax Residency

Board of Taxation Recommendations on Tax Residency – the Australian Board of Taxation has released their recommendations surrounding the Australian expat tax residency rules.

In the report the Board has recommended that the existing rules be reformed as the current tax residency rules do not adequately address the changing employment and lifestyle landscape of the 21st century.

The existing tax residency rules were written in 1936 and as we have seen in the recent Harding v ATO case has not kept up with the increasingly global nature of the Australian workforce.

In its proposal, the Board has attempted to provide greater certainty for Australian expats with a more transparent focus on the tax residency rules.

Some of the proposed tax residency changes include:

  • Making physical presence the primary measure of tax residency – moving Australia to closer alignment with international practice;
  • Focusing on an Australian expats connections – providing that two individuals with identical physical presence and other connections to Australia should be treated the same; and
  • Utilising quantifiable criteria – removing any requirement to test intention or undertake broad, holistic examinations.

The Board recommends replacing the rules with a simplified tax residency test. The Board’s preferred approach is a two-step model :

  1. A primary ‘days count’ bright line test that automatically determines the residency status of most individuals; and
  2. A secondary test taking into account individual circumstances, which leverages some existing case law, as well as international practices.

Secondary rules adopt a day-count test together with a new factor test. The four factors include the right to reside in Australia, Australian accommodation, Australian family, and Australian economic connections.

When an Australian expat is required to apply the factor test, and satisfies any two of the factors, the individual will be a resident under the proposed tax residency factor test.

Key features of the Board of Taxation’s proposal are:

  • An individual who spends 183 days or more in Australia in an income year would be a tax resident for that income year, regardless of the person’s broader circumstances.
  • An individual who spends less than 183 days in Australia in an income year could also be a tax resident for all or part of that year, if the person meets certain tests.
  • An individual who had been resident for three or more consecutive years would have to satisfy more requirements in order to cease Australian tax residence.
  • An individual who is seconded overseas for more than two years, has accommodation available to them at the place of employment throughout, and spends less than 45 days in Australia during each income year of the overseas employment period, would be a non-resident during the overseas employment period.

The Australian government has not provided a official response to the Board’s proposals however given the rapidly changing nature of the Australian expat community any amendments along these lines would be welcomed.

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