INCOME TAX RESIDENCY RULES FOR INDIVIDUALS: BOARD OF TAXATION RECOMMENDS REFORM MEASURES

On 9 July 2018, the Board of Taxation publicly released its initial report on its review of Australia’s individual income tax residency rules. The report, Review of the Income Tax Residency Rules for Individuals, follows the completion of the Board’s review in August 2017. The Minister for Revenue and Financial Services, Kelly O’Dwyer, said the Board found that the current individual tax residency rules require modernisation and simplification. The Board also identified opportunities for tax arbitrage, for example where individuals become “residents of nowhere” when they leave Australia and do not become tax residents of another jurisdiction. Ms O’Dwyer said that before the government takes any position on these matters, she has asked the Board to consult further on key recommendations, including how Australia could draw on residency tests in other countries.

The report considered whether the current Australian individual income tax residency rules (largely unchanged since 1930) are sufficiently robust to meet the requirements of the modern workforce, address the policy criteria of simplicity, efficiency, equity and integrity, and take into account a significant number of cases heard since 2009 relating to individual residency.

Following a consultation process, the Board concluded that the existing residency rules are no longer appropriate and need to be modernised. Thus, it has recommended a two-step model as follows:

•       A primary “days count” bright-line test that automatically determines the residency status of inbound and outbound individuals. This test would be similar to the residency rules adopted in New Zealand and the UK.

•       For inbound individuals, the report considered an inbound individual to be resident if they are physically present in Australia for 183 days or more in a 12-month period. This test would provide certainty for individuals and reflect the need to ensure that it is not open to overly simplistic manipulation (for example, by staying in Australia for less than half of two separate income years in one 12-month period).

•       For outbound individuals, the report recommended individuals be considered non-resident if they work full-time overseas and spend less than 31 days working, or 61 days total, in Australia. Former residents would become non-resident if they spent less than 16 days in Australia; and individuals that have never been a resident of Australia would remain non-resident if they spent less than 46 days in Australia.

•       The Board also recommends a secondary test that takes into consideration individual facts and circumstances. This secondary test would apply if an individual did not satisfy the primary test. This test would leverage some existing case law with respect to the principles of the resides test, the domicile test (in particular, the permanent place of abode test) and the 183-day tests (in particular, the usual place of abode test).

As regards the “resident of nowhere” concern, the Board has recommended that the new residency test for outbound individuals should ensure that all residents remain residents unless and until tax residency is established in another jurisdiction.

The Board also considered that the “superannuation test” no longer achieves its policy objective for government staff and their families and has recommended that the new residency definition not include the superannuation test. The report states that, “should the government continue to treat government officials as residents, the new residency definition should include a more effective rule that reflects the government’s position, such as a specific government services rule.”

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