On 9 July 2018, the Board of Taxation (BoT) made public its August 2017 report to the Government, Review of the Income Tax Residency Rules for Individuals. on the same day, Minister for Revenue: Kelly O’Dwyer requested that the Board of Taxation undertake further consultation with regard to its recommendation to introduce a new set of individual tax residency rules.
The Board’s findings and recommendations can be summarised as follows:
- Residency is a growing area of disputation due to changes in mobility of labour, a qualitative ‘weighing’ system that digs into the Taxpayer’s private life and the very considerable narrowing of the ‘exemption’ provided for foreign source income, from the old s23(q) to the replacement s23AG, which has more recently been made inaccessible to all but aid workers.
- The ‘residency’ rules should be modernised and made more workable. Ideally, this should start with a ‘bright line’ (count the number of days) rule for becoming non-resident and resuming residency, with a back up weighing of more objective factors (perhaps borrowing from the ‘tie-breaking’ rules in our Double Tax Agreements).
- Residency should not be lost, until proven to be established elsewhere.
- Government officials should no longer be deemed to be resident (the same rules as for others should apply).
- If the Government was not minded to completely rewrite the rules (as above), they could either do a ‘band-aid’ set of amendments or could could codify the common law terms (such as the UK recently did).
The stakes are particularly high when taxpayers are heading to jurisdictions with low or no income tax which may not have tax treaties with Australia (as in the Harding case). A finding of continued Australian tax residency, in these situations, can often mean the difference between a taxpayer paying full Australian tax on foreign wages, or no tax at all.
There is also a flow-on effect to an employer, who may be faced with complying with Australian pay as you go (PAYG) withholding and other employer tax obligations for residents, depending upon the employer’s connections to Australia.
The recent case of Harding v Commissioner of Taxation  FCA 837, provides insight into some of the problems applying Australia’s “qualitative” individual tax residency rules. In this case, the Taxpayer failed to establish that he was non-resident, having conceded that he had not abandoned his Australian ‘domicile’ (despite having spent most of his working life in the Middle East, and being, in the year in question, overseas indefinitely, if not permanently. Ultimately, he could not show that his stable ‘abode’ overseas, was not sufficiently ‘permanent’ because it was an a serviced apartment, allowing him to move his personal effects in just a few suitcases. This is a really odd decision, in common sense terms, and begs some review (if not by the Appeal Court, then by the legislature – for which this is a precursor step). See the related TT Article.
The Board has provided its initial report to the Minister. However, the Minister said that these are complex issues that deserve further analysis and consideration.She said that “Before the Government takes any position on these matters she has asked the Board to consult further on key recommendations, including how Australia could draw on residency tests in other countries.”
Comprehension questions (answers available)
- Was the Board’s report on our residency rules, for individuals, self-initiated?
- Did the Board recommend changing these rules?
- Did they recommend a ‘bright line’ test (such as a ‘count the days’ test) without any fallback tests?
- Were there any other suggestions?
- Did the Minister accept their recommendations?