Budget 2022- Residency changes

 Changes to Individual Residency Tests - Budget 2021-2022 Announcements

Following recommendations from the Board of Taxation, the Government has announced in its most recent 2021-2022 Budget changes to the current individual residency tests. The modernisations of the changes is intended to take the complexity out of determining your residency status, which is currently based on your unique facts and circumstances.

What are the current Residency tests?

There are currently four tests that help determine an individuals residency for tax purposes in Australia. These tests are:

1. Resides Test

2. Domicile Test

3. 183-day Test

4. Commonwealth Superannuation Test

Resides Test

This is the primary test for determining tax residency in Australia. The test looks at whether you, the individual, resides in Australia. Where this test is met, you will be considered an Australian resident for tax purposes. You will not need to determine if you meet the other residency tests.

Domicile Test

This test looks at the location of your permanent home, as determined by law. This is usually tested by looked at domicile by origin which refers to the country in which you were born. Secondary, it looks to domicile by choice, where you have changed your home with the intent of making it permanent in another country.

183-day Test

This test is the one most discussed at the pub – however it only applied to individuals who are incoming to Australia. Where you are physically present in Australian for more than 183-days in an income year (continuous or broken), you are considered a tax resident of Australia – unless you can show your usual place of abode is elsewhere.

Commonwealth Superannuation Test

The final test apply to Australian Public Service employees who are contributing members of the Commonwealth Superannuation Scheme or the Public Service Superannuation scheme. A spouse and children under 16 are also considered tax residents of Australia of an individual who meets this test.

Current complexity in determining residency status

The current systems require individuals and their advisors to understand the four statutory residency test as well as an extensive body of case law precedent. Further complications is added where the other country in questions has a Double Taxation Agreement with Australia.

When is a Double Taxation Agreement relevant in determining residency?

Double Taxation Agreements (‘DTA’), or tax treaties, are formal bilateral agreements between two jurisdictions – currently Australia has DTA’s with over 40 jurisdictions. DTA’s are designed to prevent the double taxation of income and fiscal evasion over Australia and other jurisdictions.

Australia’s DTA's operate to:

• Reduce or eliminate double taxation caused by overlapping tax jurisdictions
• Provide a level of security about the tax rules that will apply to particular international transaction by:
• Allocation taxing rights between the jurisdictions over different categories of income
• Specifying rules to resolve dual claims in relation to residency of a taxpayer and source of income
• Providing an avenue to present a case for determination by the relevant taxation authorities where a taxpayer considers there has been taxation treatment contrary to the terms of a tax treaty.
• Prevent avoidance and evasion of taxes on various forms of income flows between the treaty partners by:
• Providing for the allocation of profits between related parties on arm’s length basis
• Generally preserving the application of domestic law rules that are designed to address transfer pricing and other international avoidance practices
• Providing for exchanges of information between the respective taxation authorities
• Facilitating investment, trade movement of technology and movement of personnel between jurisdictions – for examples, by reducing rates of withholding tax.

Generally, a DTA will have a ‘tie-breaker’ test where a dual resident is deemed to be a resident solely of one of the two jurisdictions for tax purposes. The tie-breaker test usually looks to economic and social links the individual has to each jurisdiction to determine where the individual has more ties.

What are the Proposed Changes to Residency tests in Australia?

The proposed changes attempt to reduce the complexity of the four existing tests. Instead, a 2-step process will be enacted, where the first step is a ‘Bright Line Test’. The ‘Bright Line Test’ will look to whether the individual has been physically present in Australia for more than 183 days in an income year.

The second step will apply where an individual was in Australia for less than 183 days in an income year to determine when Australian tax residency commenced or ceased. A ‘Factor Test’ requires determining if an individual meets any two of four factors. The factors are:

1. The right to reside permanently in Australia (including citizenship and permanent residency);

2. Australian accommodation;

3.  Australian family; and

4.  Australian economic connections.

In our opinion, these changes will still leave a considerable number of cases to be determined through the ‘tie-breaker’ articles in Australia’s DTAs, so many people are still going to need advice and support in navigating these issues in practice.

When will these Proposed Changes come into effect?

The proposed changes will apply from the first 1 July following amending legislation receiving Royal Assent – I.e once the law has been enacted.

How can Tax Controversy Partners help you?

In our experience, residency matters – which may initially seem simple on its face – can be very complex, depending on the individual's circumstances. Where you are considering a move overseas or to Australia, or where you are already overseas and have neglected your taxes, we recommend that you obtain legal advice on your residency status for tax purposes prior to changing your circumstances and well before lodging any tax returns. For Australian tax resident – all worldwide income is taxable in Australia, which can result in a large Australian tax bill if you are living and earning income overseas, but are still viewed as a resident here.

At Tax Controversy Partners, our experienced lawyers can advise you on your residency status for tax purposes considering your personal circumstances. We expect that even after the Proposed Changes are enacted, there will still be complexity in determining and understanding individual's residency position. Please contact us using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.