In the 2021 – 2020 Federal Budget, the Government announced changes regarding the individual tax residency rules, intending to simplify the rules.
Current individual tax residency rules
Under the current individual tax residency rules, a person would be a resident of Australian for income tax purposes if one satisfies at least one of the following residency tests:
- Residence accordingly to ordinary concepts (i.e. someone who resides in Australia);
- The domicile and ‘permanent place of abode’ test;
- The 183-day test; or
- The Commonwealth superannuation fund test.
The above tests are required to be performed in descending order until one is satisfied.
These rules for individuals have practical difficulties to apply, and as the primarily ‘resides’ test is highly subjective, it has been creating uncertainty and resulting in high compliance costs for individuals and their employers.
Accordingly, there have been some discussions between the Board of Taxation and the Government since 2016 regarding the modernisation and simplification of the individual tax residency rules.
The reason the tax residency rules are important is because an Australian tax resident will be taxed on worldwide income and the individual top marginal tax rate is relatively higher (47%) compared to global comparisons.
However, there are still some benefits of being tax residents, including:
- 50% CGT discount if the CGT asset is held for greater than 12 months;
- Main residence exemption from CGT rules upon sale;
- No stamp duty surcharge or land tax surcharge on property transactions.
Proposed tax residency rules
Therefore, the Government in the 2020-2021 Federal Budget announced that it will replace the current individual tax residency rules with new primary and secondary tests to determine one’s tax residency.
The primarily test is the 183-day test, that is, if a person who is physically present in Australia for a period of 183 days or more in any income year, this person will be considered as a resident for Australian tax purposes.
The secondary test is a ‘Factor Test’ which applies to individuals who spend more than 45 days but less than 183 days in an income year. The secondary tests focus on four factors, two of which must be satisfied by that person to be deemed as resident for tax purposes. Factors include:
- The Right to reside permanently in Australia (e.g. citizenship or permanent residency);
- The ability to access accommodation in Australia (e.g. rights of ownership, leasehold interest, licenses);
- Whether the individual’s family (spouse or any of their children under 18) are generally located in Australia;
- The individual’s Australian economic connections (employment, carry on business, interests in Australia).
Practical challenge under the proposed new rules
Although the new proposed rules remove uncertainties exhibited under the current tax residency rules, it may impose some practical challenges as well, especially around the Double Tax Agreement.
For example, it is not uncommon that we see taxpayer move permanently overseas with their families to countries where Australian has no double tax agreement. That means, there may be some inequitable treatment between taxpayers who start living in countries with which Australia has a double tax agreement, compared to those that do not.
This article was co-authored by Gloria Liang, Tax Consulting, Senior Manager at HLB Mann Judd Melbourne.