There is no doubt that Australia’s tax residency rules are complex, especially regarding individuals.
For some time, there has been talk of simplifying these rules to introduce a new ‘bright lines’ test. Under this test, an individual would be an Australian tax resident where they are physically present in Australia for 183-days or more in any income year. Where this primary test is not met, secondary tests that depend on a combination of physical presence and measurable objective criteria would apply.
Although reform of the individual tax residency rules is still on the cards, there has been no legislative change to those rules yet. However, following some recent high-profile residency cases, the Commissioner of Taxation has released updated guidance on how the existing rules should apply.
What is the new guidance?
On 6 October 2022, the Commissioner released Draft Taxation Ruling TR 2022/D2.
The ruling consolidates and replaces previous tax rulings that applied to individuals moving overseas (IT 2650 Income tax: permanent place of abode Australia) and individuals coming to Australia (TR 98/17 Income tax: residency status of individuals entering Australia).
The ruling also considers the impact of the recent developments in case law, including Harding v Commissioner of Taxation [2019] FCAFC 29, Pike v Commissioner of Taxation [2019] FCA 2185 and Addy v Commissioner of Taxation [2019] FCA 1768.
At its core, an individual’s tax residency is a question of fact based on their specific connection to Australia. Notwithstanding this, the ruling provides 14 examples to illustrate the ATO’s current view on residency in particular scenarios (both inbound and outbound).
What does the new guidance mean for you?
Although the ruling largely consolidates what we already know, it emphasises some key points individuals should consider when assessing their tax residency for a particular year.
If you are leaving Australia:
- Showing you have a permanent home overseas
- Your type of accommodation is not as important as the nature of your presence in the overseas town or country. You will need to show behaviour that is consistent with you abandoning residency in Australia and living in that town or country in a permanent way. For example, if you move overseas with your spouse and children and secure an open-ended employment contract there, this could demonstrate behaviour that is consistent with you living overseas in a permanent way.
- If you move from country to country or place to place, you will not have a permanent home overseas and will remain a resident of Australia.
- Broadly, the ATO considers two years is a substantial period overseas. If your intended length of stay overseas is less than two years, you are unlikely to be able to establish that your permanent home is outside of Australia. Conversely, just being overseas for more than two years does not automatically make you non-resident.
- Ceasing connections with Australia
- Having a connection to another country does not necessarily diminish a connection to Australia. For example, if you have an ongoing, deliberate connection to Australia even though you have a connection to another country through work, you can still be regarded as residing in here.
- Retaining your home in Australia does not necessarily mean that you will remain a resident. It will depend on the circumstances and reasons for its retention. For example, if you retain your home but lease it to an arm’s length party, the retention of the home will be of lesser significance than if you retained the home as a place for you to stay when visiting Australia.
- The type of visa you obtain to facilitate your move can be critical. For example, you should consider obtaining a visa to migrate to a country rather than a visa to work in that country. A visa to migrate to a country would be consistent with an intention to make your home indefinitely there. However, a working visa will usually not be sufficient evidence of an intention to make that country your new home.
If you are coming to Australia:
- Are you just a visitor or is this your home?
- Merely staying in Australia is insufficient to establish that you reside in Australia. You would need to show some connection to Australia that characterises you as residing in here. For example, if you enter Australia and take up long-term accommodation, employment, enrol children in school and take part in regular extracurricular activities, this could demonstrate behaviour consistent with residing in Australia.
- Broadly, the ATO’s view is a stay of six months in Australia is not sufficient time to be regarded as residing in Australia.
Regardless of whether you are moving overseas or coming to Australia, the Commissioner will look beyond the period in question where you have spent time in (or out of) Australia. This means you will need to consider factors from the relevant income year but also from surrounding income years for evidence to support a conclusion on your residency.
Once the final ruling is issued, it is proposed to apply both before and after its date of issue.
For more information on the new guidance, you can read the full ruling here.
Should you require any assistance with working out your individual tax residency status, please contact your local William Buck Tax Advisor.
