Where Are We At Now?
In the 2021–22 Federal Budget, the Coalition announced that a new “modernised framework” for Australia’s residency laws would be introduced.
It was to be based on a report by the Board of Taxation (Review of income tax residency rules for individuals 2017) published in March 2019.
The reforms were essentially proposed to introduce simplicity and certainty by replacing our current residency laws with a framework that is hoped will reduce the difficulties that both taxpayers and the revenue office have with determining tax residency for some individuals.
The Board noted an apparent explosion of residency cases since the removal of the 90-day exemption for foreign service.
The Board’s Proposal
The key reform was to be the introduction of a “bright line” 183-day test, and “other secondary tests” which would depend on a combination of physical presence and other “objective criteria”.
For such a major measure, insufficient detail was provided in the Budget and it has provoked significant concerns. The reference to the 183-day bright line test was clear enough. But it was the imprecise reference to “other secondary tests” that caused consternation in Australian expatriate circles.
A review of the Board’s report indicates that the “other secondary tests” included a “Ceasing Residency Test’’ and a “Commencing Residency Test”.
If the government had accepted the Board’s entire framework, it should have mentioned those tests explicitly, without leaving it to the public to read between the lines.
There is justified concern that aspects of these tests are unworkable and that the attempt to codify common law residency principles into these secondary tests is not appropriate.
Specifically, the notion that an Australian would be considered a resident if they spend more than 45 days in Australia in a tax year is anathema to many.
With memories of 14-day quarantine periods still fresh, a “45-day rule” could effectively limit time in Australia to 30 days if quarantine rules were to be re-imposed.
Horizontal equity issues contained in the proposals need to be dealt with also, and one can anticipate a range of interpretational problems arising with several elements of the secondary tests.
Unfortunately, it has been almost two years since the announcement and Australian expatriates have been left hanging.
If the government wishes to continue with the changes, it should make an announcement soon and ensure genuine and extensive consultation on any draft legislation.
There is an opportunity now to engage with Australia’s expatriate community in a transparent way, to show that the new government is more willing than its predecessors to consider their views.
The aim should be to avoid imposing harsh approaches to a segment of the Australian population.
Further Consultation
Pleasingly, Treasury has conducted a further round of consultations in relation to the proposed measures and issued a consultation paper entitled Modernising individual tax residency July 2023. A number of consultation questions were raised by the Treasury.
Submissions closed on 22 September 2023.
CST provided a comprehensive response to the Consultation question, but also provided suggestions as to how the current rules could be modernised without the need for wholesale change which risks inequity and further complexity.
Proposed Framework For Residency
Our proposed framework is as follows.
A person is a resident of Australia if:
- The Bright Line Test applies – they have been in Australia for at least 183 days in the income year unless the Commissioner of Taxation rules that the person has a permanent place of abode overseas and is not a resident of Australia under ordinary concepts.
- They have been in Australia for more than 60 days but less than 183 days in the income year and either;
a. they reside in Australia (Resides Test); or
b. they are an Australian Citizen or permanent resident – unless they have permanent place or abode outside Australia (Overseas Abode test).
The proposed framework simplifies the Australian residency test based on the length of time the individual is in Australia during the financial year:
- The Bright Line Test when the individual has been in Australia for at least 183 days.
- The Resides Test and an Overseas Abode Test applies when the individual has been in Australia for between 60 and 183 days.
The Bright-Line Test
A bright-line test is clearly defined and measurable.
Since there is little room for interpretation a bright-line test provides a clear and simple test.
Flexibility to deal with harsh or unfair outcomes is provided for because the Commissioner of Taxation can determine that a person has a permanent place of abode overseas and that they do not reside in Australia under ordinary concepts.
Taxpayers who need to can apply to the Commissioner for such a determination.
The Resides or Overseas Abode Test
The Bright Line Test, as proposed above, only deals with the situation when a person has been in Australia for at least 183 days.
If a person is in Australia for less than 183 days, the person may still be resident of Australia.
In recognition of that reality our framework proposes that if a person has been in Australia for more than 60 days but less than 183 days they will be a resident if:
a. they pass the Resides Test; or
b. they are an Australian citizen or permanent resident, unless they satisfy the (Overseas Abode Test)
Our framework recognises that there should be a set number of days that taxpayers can spend in Australia, whatever their circumstances without being treated as a resident.
Our framework provides the certainty to taxpayers that if they are not in Australia for more than 60 days they should not be a resident.
Removing The Concept Of Domicile
The proposed framework will simplify the overseas abode test.
Since the broader community may not understand the concept of “domicile”, the concept of “citizenship” is well understood.
Under the adjusted overseas abode test any Australian citizen would need to have a permanent overseas abode in order to be treated as a foreign resident.
Summary
Our proposed framework modernises and simplifies the existing rules by:
- Applying a Bright Line Test if a person has been in Australia for 183 days or more, while allowing for the Commissioner’s discretion to address unusual cases.
- Retaining the common law test (Resides) for all taxpayers who are in Australia for 60-183 days;
- Treating Australian citizens (and permanent residents) as residents if they have been in Australia between 60 to 183 days, unless they pass the Overseas Abode Test.
- Ensuring that taxpayers in Australia for less than 60 days in a year be treated as non-resident.
The construction of the tests means that the Resides Test will only usually be relevant for taxpayers who are not Australian citizens or permanent residents and consequently that will greatly reduce the occasions on which the common law would need to be considered.
