Most Australians working offshore, or foreigners working in Australia, will be aware of the complexity of Australia’s tax rules – particularly those that apply to the question whether they remain or become a resident of Australia.
Where are we now?
Those rules are based on broad, undefined concepts in the tax legislation: “resides”, “domicile”, permanent place of abode” and “usual place of abode”.
Where a person “resides” is a subjective test which balances various factors, including:
If the person doesn’t “reside” in Australia under this test, they will nevertheless be resident here if their “domicile” is in Australia, unless their “permanent place of abode” is outside Australia.
Then, if a person spends more than 183 days here, they will be assumed to be an Australian resident unless the Commissioner is satisfied that their “usual place of abode” is outside Australia and they don’t intend to take up residence here.
Finally, there is an additional overlay if a taxpayer is a member of certain Government superannuation funds.
This unsatisfactory combination of objective fact, intention, ATO discretion and fluctuating policy has generated uncertainty and risk for individuals under a self-assessment tax system. More fundamentally, the current rules fall a long way short of the needs of a modern, mobile workforce.
In response to industry lobbying, which was led by the Board of Taxation, in the May Budget the Government proposed to introduce a new set of rules. The intention is to provide much-needed clarity for mobile workers by setting a bright line primary test to determine residency in most cases; and a secondary “factors” test that takes into account the individual’s circumstances.
Scant detail has been released by the Government and we may not see draft legislation for a while. However, the expectation (informed by the Board of Taxation recommendations) is that separate rules will apply to inbound and outbound workers (the policy rationale being that it should be harder for a resident to lose residency than it is for a non-resident to gain it).
What has been announced is that there will be:
A primary “bright line” test that sets a clear day count –183 days for inbound and potentially shorter for outbound; and
Secondary factors that depend on measurable, objective criteria. These are a nod in the direction of the existing subjective tests and would be expected to include:
Where will this land?
Since the Budget, there have been rumblings in the press about where the bright line will be set and whether the secondary factors leave too much residual uncertainty. There is a danger that we’ll swap one set of complex rules for another.
Bear in mind, the last word may not have been said on this topic. The new rules haven’t been drafted and won’t take effect until after legislation is passed by Parliament.
As is the case with all tax reform, there will be winners and losers from these changes. Some expats may need to keep a closer tab on their visits to Australia. However, a move that provides greater clarity for the majority of taxpayers should be welcomed.