ATO releases draft ruling TR 2022/D2 on tax residency principles – The Australian Taxation Office (ATO) have released much anticipated guidance on the current residency rules with Draft Taxation Ruling TR 2002/D2 (Draft Ruling)
The Draft Ruling replaces longstanding ATO guidance in IT 2650 and TR 98/17, essentially combining the content along with some recent case law.
The Draft Ruling adds in some useful examples including the application of the working holiday maker rules.
Overall, there is nothing too ground-breaking in the Draft Ruling. The ruling summarises the lay of the land in a reasonably easy to follow format, considering the concepts are reasonably complex.
Key Tax Residency Points
Under the ‘ordinary concepts’ or ‘resides’ test the key factors the ATO will consider are:
- period of physical presence in Australia
- intention or purpose of presence
- behaviour while in Australia
- family, and business and employment ties
- maintenance and location of assets, and
- social and living arrangements
The ATO have not provided a method to weigh factors against each other, but reserved the right to apply their own weighting based on individual circumstances.
To ‘reside’ is different to merely ‘staying’ in Australia.
An intent to staying in Australia less than 6 months may not be enough to satisfy the resides test (although other tests may be satisfied).
Under the ‘domicile’ test, the ATO considers these factors to be key when considering if an individual has a permanent place of abode outside Australia:
- length of overseas stay
- nature of accommodation, and
- durability of association
Consistent with previous principles, no timeframe is provided as absolute. ‘Permanent’ in the eyes of the ATO would be at least a 2-year intent, even if circumstances change.
As established in Harding’s Case, permanent ‘place’ of abode can mean the same town/city or even country.
183 Day test
Under the ‘183 day test’ the days do not need to be consecutive. Having a ‘usual place of abode’ outside Australia is a lesser standard than the domicile test’s ‘permanent place of abode’.
For example, a physical dwelling overseas does not need to be maintained.
Relevant factors in considering whether your usual place of abode is outside Australia include:
- where you lived before and after your time in Australia
- the availability of your overseas dwelling to you (if you have one) while you were in Australia
- where your possessions and assets are
- the type of visa you have and the length of your intended stay
- your purpose of coming to Australia, and
- the travel arrangements you made, including whether you departed from and returned to the same place of abode outside Australia.
Commonwealth super test
The Commonwealth super test was not considered in the Draft Ruling, although it is expected to be in the final ruling.
Relevant ATO commentary
- Short term temporary workers are unlikely to be tax residents of Australia. For example those on the short stay seasonal worker programs such as ‘Seasonal Worker Program’ and (short stay) ‘Pacific Australia Labour Mobility’ (PALM) schemes.
- Longer term temporary workers may be resident depending on facts and circumstances. For example those on the former Pacific Labour Scheme or long-stay PALM scheme.
- It is unlikely that working holiday makers will be residents of Australia
Tax Residency Summary
The Draft Ruling is subject to consultation (which ended 25 November 2022). Accordingly, it may take months for the ATO to produce a ruling in final form and update on tax residency.
As the Draft Ruling suffered significant delays, it would be reasonable to assume the Draft Ruling had undergone significant internal scrutiny.
Accordingly, our expectation is that the final ruling may not deviate substantially to the Draft Ruling.
Secondly, whilst change to the residency legislation appears to have bipartisan support, the newly elected government has not announced any timeframe or detail into what such changes may entail.
Whether the release of this guidance from the ATO can be read into as meaning that no legislative change relating to tax residency is immediately forthcoming remains to be seen, however it is not uncommon for the ATO to withhold or cancel announced guidance pending legislative reform.
Our view is that legislative change in the next 12 months is unlikely, so it may be optimistic to think we have greater clarity before the commencement of the 2025 Australian tax year.
Recommendations put forward in the Board of Taxation’s ‘Review of the Income Tax Residency Rules for Individuals’ report should be considered as commentary only including ‘bright-line’ test, as there is no indication from the government that this will be a feature of future reform, so caution needs to be taken when citing these principles.
Determining and individual’s Australian tax residency is complex and can have significant tax consequences if not considered adequately.
Need more information?
The specialists at Atlas Tax can assist to determine your likely Australian tax residency position. Don’t hesitate to contact us to book in for a complimentary discussion regarding your residency, associated implications or preparing and lodging your Australian expat tax returns.