As we head towards a federal election, announced measures yet to be legislated will be subject to consideration by the next government. This article outlines the status of proposed changes to the tax residency rules for individuals, SMSFs and corporates that now remain in limbo.
Individual tax residency rules
The individual tax residency rules were to be replaced by a new framework with a primary physical presence test.
A primary “bright line” test would treat an individual who was physically present in Australia for 183 days or more in any income year as an Australian resident for tax purposes. Individuals who did not meet the primary test would be subject to secondary tests considering a combination of physical presence and other measurable, objective criteria. Under the current rules, an individual who is physically present in Australia for 183 days or more in an income year will not be an Australian resident if their usual place of abode is overseas and they have no intention to take up residence in Australia
The new framework, announced in the 2021–22 Budget, was to be based on recommendations made by the Board of Taxation in the 2019 report Reforming individual tax residency rules — a model for modernisation.
SMSF residency requirements
Residency requirements were to be relaxed for self managed superannuation funds (SMSFs) and small-APRA regulated funds.
The 2021–22 Budget announcement proposed to extend the central control and management test safe harbour from 2 to 5 years for SMSFs and remove the active member test for both fund types. The measure was intended to provide members of these funds with the flexibility to keep their preferred fund while undertaking overseas work and education opportunities.
When announced, the measure was proposed to apply from 1 July 2022. Legislation has not been introduced for either of the proposed changes.
Residency relief was offered to SMSF trustees for the 2019–20 to 2021–22 financial years where a trustee was out of Australia for more than 2 years as a result of being stranded overseas due to COVID-19. The ATO did not apply compliance resources in these situations to determine whether the residency test was met, provided there were no other changes in the SMSF or to circumstances affecting other residency conditions. Given Australia’s international borders have now reopened, it seems unlikely this treatment will be further extended.
Corporate residency test
Technical amendments to clarify the corporate residency test were announced in the 2020–21 Budget.
The proposed changes clarified that a company incorporated offshore would be treated as an Australian tax resident if it had a “significant economic connection to Australia”. This test would be satisfied where both the company’s core commercial activities, and central management and control were in Australia. The government also announced that it would consult on broadening the proposed changes to the corporate residency test to include trusts and corporate limited partnerships in the 2021–22 Budget.
A foreign incorporated company is a resident of Australia if it carries on business in Australia and has its central management and control in Australia under ITAA 1936 s 6(1). The ATO previously held the view in Taxation Ruling TR 2004/15 (withdrawn) that this statutory test involved 2 separate requirements, ie the requirement to carry on business in Australia was separate to the requirement to have central management and control in Australia.
Following the High Court’s 2016 decision in Bywater, TR 2004/15 was replaced by Taxation Ruling TR 2018/5 with effect from 15 March 2017. The ATO’s revised view in TR 2018/5 is that “the central management and control of a business is factually part of carrying on a business”. If a company carries on business and has its central management and control in Australia, it will carry on business in Australia for the purposes of s 6(1). This interpretation of the corporate residency rules departed from the ATO’s long held position on the definition of a corporate resident. The ATO also issued Practical Compliance Guideline PCG 2018/9 to set out its ongoing compliance approach towards corporate residency, including a transitional approach for certain foreign-incorporated companies until the earlier of 30 June 2022 (or 31 December 2021 for early balancers) or the date the proposed changes receive assent.
In 2019, the government requested the Board of Taxation to review the operation of Australia’s corporate residency rules, including the definition of a corporate resident. The measure is consistent with the Board’s key recommendation in the 2020 report Review of Corporate Tax Residency and will reflect the treatment of foreign incorporated companies before the Bywater decision.
The measure was intended to have effect from the first income year after assent of enabling legislation, with the option for taxpayers to apply the new law retrospectively from 15 March 2017. Legislation has not yet been introduced to implement the proposed changes.
This article was originally written for CCH iKnow ahead of the 2022 Australian federal election on 21 May 2022.
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