As part of the 2020/21 Federal Budget, the government announced changes to individual tax residency rules, intending to simplify the rules.
With international borders finally opening, Australian expats considering a return home, should familiarise themselves with the changes.
Under the current individual tax residency rules, a person would be a resident of Australia for income tax purposes if they satisfy at least one of the following residency tests:
- Residence according 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’s been creating uncertainty and resulting in high compliance costs for individuals and their employers.
There have also been 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 per cent) compared to global comparisons.
However, there are still some benefits of being tax residents, including:
- 50 per cent CGT discount if the CGT asset is held for greater than 12 months;
- Main residence exemption from CGT rules upon sale;
- Possible exemption for stamp duty surcharge or land tax surcharge on property transactions.
As part of the Federal Budget announcement, the government announced it will replace the current individual tax residency rules with new primary and secondary tests to determine one’s tax residency.
The primary 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, they 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 Australia in an income year. The secondary test focus is on four factors, two of which must be satisfied by that person to be deemed a resident for tax purposes. These 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).
Although the new proposed rules remove uncertainties exhibited under the current tax residency rules, it may impose some practical challenges as well, including Capital Gains Tax, and the Double Tax Agreement.
For Australian residents contemplating either a move home or indeed, a move abroad, it would be worthwhile discussing the arrangement with your accountant prior. They will be able to advise on how to structure your affairs in mitigating any tax liabilities on your return to Australia.
This article was authored by Gloria Liang. This article was published in the 2021-22 Summer Issue of Financial Times.