Treasury is consulting on a new individual tax residency framework that is based on recommendations made by the Board of Taxation in 2019.
In 2019, the Board of Taxation released a report titled “Individual Tax Residency Rules – a model for modernisation” (“2019 Report“) containing a proposed model to modernise the existing individual tax residency rules. Subsequently, the former Federal Government announced in its 2021-22 Budget that the existing individual tax residency rules would be replaced by a new framework based on the recommendations proposed by the Board of Taxation in its 2019 Report.
The Board of Taxation’s 2019 Report was prepared prior to the COVID-19 pandemic. Since the pandemic has redefined how the world operates, Treasury is seeking submissions to determine the appropriateness of the proposed individual tax residency rules in this new post-pandemic environment.
What are the Board of Taxation’s proposed rules?
The proposed individual tax residency tests put forward by the Board of Taxation, are based on a ‘two-step’ model:
Step 1 – Primary tests
The first step provides two bright line (primary) tests under which an individual that (a) spends 183 days or more in Australia during the income year; or (b) is a Government official deployed overseas on foreign service, will be a tax resident.
Step 2 – Secondary tests
The second step applies where the primary test is not met for the relevant income year and provides different tests depending on whether the individual is commencing residency (i.e. was not a tax resident in the prior year) or ceasing residency (i.e. was a tax resident in the prior year).
In the case of the latter, the individual must meet one of three threshold requirements depending on the circumstances of the individual, being (1) the Overseas Employment Rule; (2) Ceasing Short-Term Residency Rule; or (3) Ceasing Long-Term Residency Rule.
Built into each of the secondary tests is a factor test that is based on four objective factors:
- Right to reside permanently in Australia;
- Australian family;
- Australian accommodation; and
- Australian economic interests.
Taxpayers are only required to satisfy a fixed number of factors to determine their residency status.
We have only provided a brief overview of the Board of Taxation’s proposed model. Further detail can be found in the Board of Taxation’s 2019 Report and Treasury’s Consultation Paper.
What is the Consultation Paper about?
The Consultation Paper provides a brief summary of the key principles underpinning the operation of the Board of Taxation’s proposed individual tax residency rules and sets out a list of questions that Treasury is seeking consultation on.
Treasury’s questions target the crux of the Board of Taxation’s proposed individual tax residency rules to seek feedback to assist in determining whether the rules should be redesigned.
It is anticipated that submissions provided as part of the consultation process will aid the current Federal Government in deciding what changes, if any, should be made to Australia’s individual tax residency rules.
Where to from here?
Treasury is inviting interested parties to comment on its Consultation Paper with submissions due on 22 September 2023.
As of the date of this article, it is still uncertain as to whether the current Federal Government will proceed with implementing the proposed individual tax residency rules.
Until further notice, the existing individual tax residency rules continue to apply when determining an individual’s tax residency status. This requires a detailed analysis of all the facts and circumstances of the individual.
