The current rules for determining an individual’s tax residency have remained largely unchanged since they were enacted in 1930. With the changing global workforce and a rise in the number of cases surrounding an individual’s residency, the Board of Taxation (“Board”) has undertaken a review and found that the current rules require modernisation and simplification.
The Government acknowledges the complexity of the issues and has requested the Board to undertake further consultation.
During its initial consultation, the Board considered that the modernised residency rules should reflect the following principles:
- reflect current global work practices;
- provide certainty to individuals of their tax residency status;
- be able to be applied by an ordinary individual without advice in all but the most complex cases;
- remove antiquated concepts such as domicile; and
- adopt factors that are easy to understand, reduce reliance on common law definitions and are less open to manipulation.
Board recommendation to replace current definition
Following its initial consultation, the Board recommends the current definition of resident be replaced as follows:
- There should be a policy statement, such as an objects clause, that outlines the Government’s overarching individual tax residency policy addressing the tax policy objectives of equity, efficiency, simplicity and integrity.
- In accordance with the policy statement, the new resident definition should include separate definitions for individuals establishing residency and ceasing residency:
- Each definition should commence with a simple bright line ‘days count’ test that ensures the vast majority of individuals can determine their residency quickly and with certainty; and
- For individuals that do not satisfy either bright line test, an objective test based on the individual’s facts and circumstances should then apply to determine residency on the basis of specific key factors (to determine the individual’s connection or relationship to Australia).
- A rule should be adopted to the effect that Australian residency is maintained until tax residency is provably established in another jurisdiction.
- A new rule (such as a specific government service rule) that reflects the Government’s position regarding public servants.
Ceasing to be a resident – deemed disposal of assets
Amongst a number of other observations by the Board, it noted that the Australian Taxation Office (ATO) increase its compliance efforts in relation to assets that are deemed to remain taxable Australian property when an individual ceases to be an Australian tax resident.
The Board suggests such assets be catalogued and reported to the ATO to use as a reference point for tracking future disposals of such assets for capital gains tax (“CGT”) purposes.
It will be some time before any final response by the Government given its ongoing implementation and enactment of already announced measures. We will continue to monitor developments but in the meantime, we will continue to rely on both established case law and ATO rulings in determining an individual’s tax residency.