Australia: Individual tax residency rules ripe for reform

In brief - Proposed changes could have significant impact upon the tax profile of individuals with overseas connections

The Board of Taxation recently completed a review of Australia's individual income tax residency rules. The Board's proposal for new residency rules is aimed at improving certainty, reducing compliance costs and removing a potential barrier to Australia's attractiveness as an investment location.

Tax residency rules are a complex area of law and have led to numerous disputes and rulings about the receipt of individual income and the susceptibility of that income to Australian tax. They have also led to high-profile tax evasion cases and investigations relating to the diversion of income via offshore entities and structures.

The Board is of the opinion that there is a strong case for reforming the individual tax residency rules for modernisation as the current rules are uncertain, impose an inappropriately high compliance burden and are perceived to be subjective.

Current individual income tax residency rules are too complex

Four tests currently make up Australia's individual income tax residency rules:

  1. Residence test: a subjective test that balances various factors, including the intention or purpose of the presence in Australia, family and business/employment ties; the maintenance and location of assets, and social and living arrangements
  2. Domicile test: a taxpayer is a resident of Australia even if they do not "reside" in Australia under the first test but are nonetheless "domiciled" in Australia
  3. 183 day test: a taxpayer is assumed to be a resident if they are in Australia for 183 days or more, unless the Commissioner is satisfied that the individual's "usual pace of abode" is outside Australia, and
  4. Superannuation test: a taxpayer is a resident if they are a member of certain Government Superannuation funds, established under the Superannuation Act 1976.

Given that residency rules are a fundamental part of the income tax system, determining both an individual's tax base and rate, the Board considers it to be inappropriate that these tests should be so complex.

Board of Taxation's proposed reforms to tax residency rules

The Board seeks to consult on the following eight design features:

  1. A guiding "adhesive residency" principle
  2. An adhesive residency principle means that it should be harder to cease residency than it is to establish it.

    Once sufficient time is spent in Australia, and connections are sufficiently embedded, then it is appropriate that this level of engagement must be scaled back to a large extent before residency ceases.

    To provide certainty there should be clear thresholds for confirming residency that will balance the time spent in, and other connections with, Australia but in a way that removes the perceived subjectivity of the current rules.

    At the same time, the rules should not make it easier for individuals who have close ties with Australia to be able to game the system and not pay their fair share of tax.

  1. There should be a statement of individual residency policy
  2. There should be an objects clause or theme statement in the Income Tax Assessment Act 1997 that encapsulates the principles underpinning the residency rules and the Government's policy intention.

    Such a statement along the lines of residency is the extent of the individual's exposure to Australia's economic, social and environmental infrastructure. Exposure to such benefits, through time spent in Australia and certain ties to Australian society, should ultimately lead to tax residency and obligations to pay into the system.

  1. Bright-line test for inbound and outbound individuals
  2. The bright-line test will act as a primary test to help those clearly resident and non-resident to identify the basis on which they may claim such status to manage their tax affairs accordingly.

    The "inbound individual" test determines whether an individual has automatically established residency. The common standard is 183 days to determine whether an individual spends the majority of their time in Australia. An individual may then be a resident for that part of the first income year in which they were physically present, while the second year would be determined under the "outbound individual" bright-line test, the secondary test or a split year treatment.

    The "outbound individual" test will adopt a lower bright-line threshold for those who visit Australia for business or leisure and who do not wish to be caught as a resident.

    It also provides for individuals who are working full-time overseas to be non-residents in certain circumstances.

    The Board seeks views on whether, similar to the inbound individual test, these thresholds should apply on a 12-month period basis or per income year.

  1. Factor test: determining the level of connection to Australia
  2. The factor test acts as a secondary test for individuals who do not satisfy the bright-line tests.

    Each factor indicates a level of connection and includes time spent in Australia, immigration status, family, Australian accommodation, and economic ties. The more factors an individual satisfies, the higher level of connection to Australia.

    In order to conclude whether an individual is a resident or non-resident, there should be a mechanism designed that reflects the individual's connection to Australia.

    The Board proposes two mechanisms:

    1. individuals require a number of points or "ties" to be regarded as a resident or non-resident, or
    2. whether a tax payer was a resident in the preceding income year, a set number of X or more factors must be satisfied, whereas if a tax payer is a non-resident in the preceding income year, a higher set number of Y or more factors must be satisfied

    There may also be an opportunity to align domestic tax residency with residency under Australia's double tax treaties.

    As these concepts are currently not aligned, where an individual is a resident under Australia's domestic law, but not a resident under a relevant double tax treaty, then the individual would be taxed in Australia only on income to which Australia has taxing rights but the individual has access to residence-based concessions.

  1. Integrity: resident of nowhere
  2. Under the current system, where an individual becomes a non-resident but has not established tax residency in another jurisdiction, that individual can become a "resident of nowhere".

    For high-wealth individuals, this principle may be manipulated to obtain tax advantage and can often occur before a large receipt that would otherwise be taxable is anticipated.

    The suggested approach is that where an individual has been an Australian resident and would otherwise satisfy the conditions to become a non-resident, the change in status will only be effective if the individual demonstrates that they have established residency in another country. That is, individuals remain Australian residents unless and until tax residency is established in another jurisdiction.

    The board is considering a number of alternatives based on international comparisons. This includes the United Kingdom's temporary non-residents who are charged tax on specified income and gains. A temporary period of non-resident is five years or less.

  1. Superannuation test for government employees: options for reform
  2. The Board expects that it will be appropriate to update the superannuation residency test to align with common international practice and reflect the original intention of these rules.

  1. Part-year residency
  2. The Board suggests aligning the part-year rules for the tax-free threshold with the residency rules in general, if this can be done with relative simplicity.

    Under a secondary test, an individual may cease or establish residency by a method other than time spent in Australia.

  1. Transitional rules
  2. It is expected that the rules will operate prospectively from a commencement date.

    The Board recognises potential for dispute given the proposed rules are designed differently depending on whether an individual was previously a resident or not.

Board of Taxation's expected impacts of the proposed changes

Revenue impact: intended to have an immaterial or negligible revenue impact.

Economic impact: increased certainty will aid Australia attracting inward investment and may lead to broader economic benefits.

Compliance burden: should drastically reduce, including the need for external advice over time.

Administrative impact: increased certainty should reduce the costs of ongoing monitoring and drastically reduce the need for private rulings or likelihood of costly litigation.

Impact on affected individuals: the majority of individuals will be unaffected by the transition to the Board's proposal - there will be no noticeable impact and no costs.

Toby Blyth Jessica Yazbek
Regulatory and financial services
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Jessica Yazbek
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions