Australian Expat Note – ATO Finalises Tax Residency Ruling – The Australian Taxation Office (ATO) have released much anticipated guidance on the current tax residency rules with Taxation Ruling TR 2023/1 (the Ruling) which finalises the draft released late last year TR 2022/D2.
The Ruling replaces longstanding ATO tax residency guidance for Australian expats in IT 2650 and TR 98/17, essentially combining the content along with some recent case law.
The Ruling adds in some useful examples including the application of the working holiday maker rules.
There is nothing too ground-breaking for Australian expats in the tax residency Ruling but overall, the ATO does well to summarise the lay of the land given the breadth and complexity of the concepts.
Changes from the Draft Ruling
For those who are familiar with the concepts in the draft ruling, the changes to the finalised version are largely cosmetic, but can be summarised as follows:
| Final ruling TR 2023/1 | Draft Ruling TR 2022/D2 |
| Paragraph 20 considering the ordinary concepts test focuses on “the nature, duration and quality of the person’s physical presence and intention to treat Australia as home”. | These elements not emphasised in the draft ruling, instead focusing on “all the facts and circumstances that relate to that connection as relevant”. |
| Paragraph 25 added highlighting that whilst physical presence is an important consideration, physical absence does not necessarily result in non-residence. This ties in with case law principles that a person does not cease to be a resident simply by absence; rather, the question is whether they have maintained a ‘continuity of association’ with Australia which is in turn established by considering their other connections to Australia. | No such paragraph. |
| Paragraph 48 mentions when considering the strength of family, business, and employment ties: “Business or employment ties overseas may be less significant if they can be, and are, performed from anywhere in the world.” | No such statement. |
| Paragraph 86, when applying the 183-day test, presence in Australia for part of the day counts as a whole day. | No such statement. |
| Paragraphs 96 and 97 clarify the application of the Commonwealth super test to emphasise that this applies to active members. | No such paragraphs. |
| Paragraph 104 regarding working holiday makers, the ATO raised the bar on the requirements for residency to include a longer-term intent that is consistent with living in Australia | No such paragraph. |
| Paragraph 109 emphasises the individual’s need to self-assess their residency. | No such comment. |
| Added additional example 2, 6,13 and 17 | No such paragraphs. |
| Examples 7 and 11, added additional facts. |
TR 2023/1 – key 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 intention of 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, whilst no timeframe is absolute, ‘permanent’ in the eyes of the ATO would be at least a 2-year intent, even if circumstances change and the total stay is less than that.
- As established in Harding’s Case, permanent ‘place’ of abode can mean the same town/city or even country.
- Under the ‘183 day’ test the days do not need to be consecutive, partial day counts as a day.
- Having a ‘usual place of abode’ outside Australia is a lesser standard than the domicile test’s ‘permanent place of abode’, and for example wouldn’t require a physical dwelling overseas 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
- Short term temporary workers (eg those on the short stay seasonal worker programs such as ‘Seasonal Worker Program’ and (short stay) ‘Pacific Australia Labour Mobility’ (PALM) scheme) are unlikely to be tax residents of Australia
- Longer term temporary workers (eg those on the former Pacific Labour Scheme or long-stay PALM scheme) may be resident depending on facts and circumstances
- It is unlikely that working holiday makers will be residents of Australia unless there is a greater intent to stay longer term and transition to another visa.
Tax Residency Common Misconceptions
183-day rule
A common misconception around the 183-day rule is that if an individual is not in Australia for 183 days in the year, they will be non-resident. The 183-day test is only one of the four tests, and you only need to satisfy one to be a tax resident.
Many are also unaware the 183-day test has a second requirement to it whereby the test is failed if you have a ‘usual place of abode’ outside Australia you fail the test even if you are in Australia for 183 days or more.
Australian citizens are likely to resume residency in Australia by spending much less than 183 days in Australia, under the domicile or resides test, so it would be rare for the 183-day test to apply for Australian expats. The 183-day test is relevant to foreign nationals who are inbound to Australia.
45 days in Australia
On the other end of the spectrum is the misconception that spending less than 45 days in Australia also means you are non-resident. This misconception has come from the Board of Taxation’s review on the tax residency rules, as was proposed as a ‘bright line’ test.
It is important to note that this review is not law and discussions around the final form that may become legislated is that any bright line test might be greater than 45 days.
It is clear from this Ruling that you need to look closely at the relevant factors to determine whether a continued connection to Australia is maintained under the resides or domicile tests, and there may be some cases where this exists even with less than 45 days spent in Australia in the year.
This might be where the individual hasn’t established a permanent place of abode outside Australia, for example working on a travelling boat or cruise ship.
Tax Residency Resumption Date
Many Australian expats I speak to are confused about when they will resume tax residency. There is no fixed period you need to be in Australia to become a resident, and you become a resident on the day you satisfy one of the four residency tests.
You can also be part year resident and part year non-resident, the change occurs the day you change between satisfying at least one of the tests, to satisfying none of the tests.
This is a commonly asked question, particularly in relation to expats who have returned to Australia and want to sell their main residence. It is entirely possible that you land in Australia on one day, resume residency and then sign the contract of sale the next day.
In this case you would be classed as a tax resident on the date of the sale (and therefore entitled to main residence exemption). It is important to note if your initial intent was to immediately depart Australia again, the ATO would likely take the view that you were not residing in Australia and likely did not resume residency.
There needs to be an intent to make Australia your home for a time (the length of which is not specified by the ATO).
Changes to the legislation
With the recent budget, disappointingly for Australian expats, there was no announcement of any tax residency changes. It is unclear whether this is because the original plan to update the law had bipartisan support, or whether these changes are likely to be pushed to the mid to long term.
In my experience the ATO does not usually issue such significant guidance revisions if legislative change is imminent.
Therefore, it is my view that that legislative change in the next 12 months is unlikely, and due process would likely take a year, with the law to come in at the new financial year following the passing of the legislation.
Therefore, it may be optimistic to think we have greater clarity before the commencement of the 2026 Australian tax year at earliest.
Conclusion
It is increasingly clear that determining tax residency is complex and, in many cases, not something that a lay individual would or should be expected to be able to determine themselves.
The ATO does not provide a clear weighting of particular factors and goes so far as to say that they have the right to put their own weighting on the factors as they see fit.
Therefore, it is not something that you can apply a ‘check box’ style approach to and every circumstance must be carefully examined to arrive at a defendable position.
This is clearly an undesirable and unsustainable approach, as obtaining a private ruling is typically a costly, time consuming and also rigid process where an individual’s circumstances may change from one year to the next.
Arriving at the wrong residency conclusion can have a significant tax impact and cause some sleepless nights for expats.
The specialists at Atlas Tax draw on the latest ATO guidance, case law and private rulings to work with expats to help determine their likely Australian tax residency position and advise on the Australian tax implications of their position.
Don’t hesitate to contact us to book in for a complimentary discussion regarding your residency or preparing and lodging your expat tax returns.