Contributed by Andrew White, Partner and Linda Trieu, Senior Associate, Greenwoods & Herbert Smith Freehills
- The Board of Taxation’s 2019 report, which proposes a new definition of ‘resident’ for individuals, will form the background for a new statutory definition to take effect soon
- The proposal starts from a clear test: is the person present in Australia for 183 days during the income year
- But persons who are present for as little as 45 days can also be resident for tax purposes if they have other connections with Australia such as family or investments or a residence
- And many people who have left Australia may find that they are still resident of Australia for several years
- The new definition will have important consequences in areas such as Australia’s claim to tax, entitlements to tax offsets, obligations to withhold, exposure to controlled foreign company (CFC) attribution, exposure to capital gains tax (CGT) and superannuation.
At first glance, the current definition of “resident” seems not to be especially challenging and few taxpayers or their employers give it a moment’s thought; fewer than 1% of taxpayers claim to be non-residents in any year. But the recent spate of cases on residence suggests that the rule is proving difficult to administer. A new definition of “resident” will have important consequences in areas such as Australia’s claim to tax, entitlements to tax offsets, obligations to withhold, exposure to CFC attribution, exposure to CGT and superannuation.
The Board of Taxation’s 2019 report on residence attributes this difficulty to the “facts and circumstances” aspect of the rule - the definition asks, how long is the person in any place, why are they there, what are they doing, are they alone, where is their family, do they have any commercial interests there, do they have assets there, and so on? The Board laments that, “the concept of residing has become more uncertain over time [because it involves a] complex balance of physical presence and intention”.
So the Budget announcement of “a new, modernised framework” is welcome, but the qualification that it will be, “based on recommendations made by the Board of Taxation” is both good news and bad. The Board’s 2019 Report is not straightforward and will still involve many fine and subtle judgments. Some of that complexity arises because the report quite deliberately, “… has maintained existing outcomes (in a streamlined and simplified way) where appropriate in order to minimise disruption and revenue implications”. So, it seems we will have a new route to the same destination.
The Board’s report divides the world into 3 groups: continuing, arrivals and departures. This approach lays bare the problem that nations are greedy: they want to capture arrivals early, and they want to retain departures for as long as possible. This is evident in current ATO practice which suggests arrivals can acquire residence even before spending 6 months in Australia (TR 98/17), while departures need to be gone for 2 years before they can hope to lose residence (IT 2650). (It also explains why we have a temporary resident regime to turn short-term workers on temporary visas back into non-residents again for most tax purposes!) The Board’s approach retains this feature – it can take as little as 45 days to become a resident, and at least 2 years to become a non-resident for long term residents.
The starting point of the Board’s proposal is, an individual will be a resident if they have been present in Australia for 183 days (or part thereof) or more in the current income year. This seems clear and simple and will be applicable to 99% of taxpayers, although some complexity arises even at this stage:
- the Report suggests departures from the 183-day test will be needed to handle unwanted physical presence – injury, illness of a family member, natural disasters, plane delays and missed connections, transit to another country, periods in gaol (not to mention, the inability to get out of Australia). The Board says some of these reasons are good; others are not; and says nothing principled about making the distinction. Yet the ATO will be given a discretion to draw that distinction, and say a person who was in Australia for 183 days was, nevertheless, not a resident by not counting some days, and
- a person who is present for, say, 200 days will be a resident, but they may or may not be a resident for the entire year. If the person:
– was a resident last year, they will be a resident for the whole of this year
– was not a resident last year, they will be a resident only from the date of first arrival in Australia.
But mere physical presence turns out not to be the simple, bright line test for the 1% of difficult cases because the Board’s proposal has other tests. A person can also be a resident if the person was present for 45 days during an income year, and the person satisfies 2 or more of 4 factors:
(1) the person has a right to reside permanently in Australia (meaning either citizenship or permanent residence)
(2) the person has access to accommodation in Australia at any point in the year (but not hotels, or the family home, or an owned property if rented to tenants for the year)
(3) the person’s spouse (including de facto and same sex partners, though maybe not an estranged spouse) or child under the age of 18 is “generally located in Australia”
(4) the person has an “economic connection” with Australia: working as employee in Australia, participating in carrying on a business in Australia (whether as sole trader, partner, trustee or possibly company director) or holding Australian assets (real estate, bank account, interest in a family trust and possibly more).
So an Australian citizen who has lived abroad for decades and does not wish to become a resident again should probably think twice about coming back to Australia for a holiday.
And a person who was not present in Australia at all during the current year, but was a resident last year, can still be a resident under any of the 2 backward-looking tests:
(1) the person was present for less than 45 days in Australia in the current income year and in each of the two preceding income years. This is the test if the person was a resident for at least 3 prior years
(2) the person was present for less than 45 days in Australia in the current income year and does not satisfy more than 1 of the 4 factors. This is the test if the person was a resident for less than 3 prior years.
And it turns out test (1) does not work well for overseas postings and so a separate test is suggested for Australian residents sent overseas: an individual will cease to be a resident on the day after departure if they are leaving to undertake an overseas posting of at least 2 years duration provided they have “accommodation available continuously in the place of employment for the duration of their employment” and they do not return to Australia for more than 45 days in any income year.
The new test will not be unambiguous and fool-proof, but it should be more manageable than current law has proved to be.
Source: This article was originally published on the Greenwoods & Herbert Smith Freehills website and has been reproduced with permission.