In May 2016, the Board commenced a self-initiated review of the current individual tax residency rules. In the course of it’s inquiries, the Board spoke to English taxing authorities (HMRC) about their experience (see Tax Technical articles: FOI notes of HMRC call, Tax Month article on FOI document).
- It found that that the current individual tax residency rules are no longer appropriate and require modernisation and simplification.
- It’s recommended model was a ‘two-step’ test – the first being a ‘count the days’ bright line test and the second that takes account of individual circumstances more (Tax Technical articles: BofT’s Initial Report).
- The Government responded by the Board to undertake further consultation to ensure that the proposed residency rules can be appropriately designed and targeted.
Accordingly, the Board has released a consultation document which covers the following.
1. Guiding principles:
- Adhesive residency – The Government has responded to the Board. In its response, the Government supported the Board undertaking further consultation to ensure that the proposed residency rules can be appropriately designed and targeted.
- Certainty: the new rules should be designed to be straightforward and provide clear outcomes for the majority.
- Simplicity: to remove uncertainty and complexity through clear, reasonable rules for determining residency for individuals with more complicated circumstances.
- Integrity: the rules should not make it easier for individuals that have close ties to Australia to be able to game the system and not pay their fair share of tax in Australia.
2. Statement of individual residency policy – the Board recommends that there be a extra statutory statement of policy that the starting point for residency should be the extent of the individual’s exposure to Australian society’s economic, social and governmental infrastructure (which is more than just where the person spends their time). This might be called ‘ties to Australia’ and could include:
- access to the privileges of Australian citizenship (or similar) – government infrastructure, security, medical and other services the Government provides to the individual;
- access to the Australian economy – the ability to access Australia’s resources such as thecapital market, a steadfast banking system, natural resources and the labour market; and
- other benefits of physical location in Australia – property (home) ownership and proximity to Australian goods, services and consumers.
3. Residency – Bright-line test (Primary Test) – a ‘number of days’ in Australia test would create automatic residency free of the more complex tests, which would be reserved for more difficult cases.
- Inbound Individuals – The Board suggests using the 183 day standard (one day more than half a year) but for any 12 month period – with residency starting when the physical presence started (for a part year, where applicable). And residency would cease under the ‘outbound’ residency rules.
- Outbound Individuals –
- Previously resident – An individual that was previously a resident of Australia is a non-resident if they spend less [??X – consultation] number of days in Australia.
- Not previously a resident – An individual that has never been a resident of Australia is a non-resident if they spend less than [??Y – less than X] number of days in Australia.
- Working overseas – An individual that works full-time overseas is a non-resident if they spend less than [??A – consultation] days working in Australia; or [??B – larger than A] days, in total, in Australia.
4. Residency – Secondary Test – would be applied to any individual who didn’t pass any of the Primary (bright line) tests (for becoming or ceasing to be a resident).
- A ‘Five Factor’ Test recommended – as follows:
- Time spent in Australia – This factor would be satisfied if the individual was present in Australia for [??D – consultation] days, if never resident; and [??E – fewer] number of days if previously resident. Both would have to be less than the 183 day Primary Test for becoming resident.
- Immigration Status – This factor would be satisfied if the individual is an Australian citizen or permanent resident.
- Family – This factor would be satisfied if an individual’s family (or relevant social grouping) is largely located in Australia.
- Australian Accomodation – This factor would be satisfied if an individual has readily accessible Australian accommodation (owned or rented) that the individual actually uses throughout the income year.
- Economic ties – This factor would be satisfied if an individual has substantial Australian economic ties (such as employment or business interests).
- Weighting of Factors – The Board favours a ‘number of factors’ approach (over a more detailed ‘number of points’ approach) with different numbers applying, depending on whether the individual was a ‘resident’ for the preceding income year (the higher number applying if the individual was NOT a resident in the preceding year). The Board is consulting on this mechanism and the appropriate number of factors or points.
- Tax Treaties – The Board notes that there may be an opportunity to align domestic tax residency with residency under Australia’s double tax treaties.
- Treaties have ‘tie breaker’ provisions for resolving competing national residency concepts – such that Australia can only tax a non-resident, under that treaty, on (essentially) source based taxing rights.
- Canada is an example of this ‘opportunity’.
- If an individual is in Canada more than 183 days, and they are not Treaty resident, then a ‘fact based’ test applies; and
- The individual will NOT be resident for domestic law, if they are NOT resident under the ‘tie-breaker’ provisions in the Treaty.
5. Integrity – resident of nowhere – plainly there are ‘integrity’ issues if a person can cease being resident in Australia and not be a resident of any other country or be a resident of a country with no, or low tax (a tax haven) or a ‘tax holiday’. This is particularly so, if it is a ‘temporary absence’ and the taxpayer expects an abnormal taxable amount.
- Must become resident somewhere else – before individual ceases to be resident. This could be achieved by certification (but this could involve importing the same uncertainty this exercise is trying to eradicate).
- Spanish system for ‘tax haven’ residents – A Spanish resident remains a resident for 5 years after becoming a resident of a designated ‘tax haven’. This, however, does not fix ‘resident of no-where’ problem. Neither does it protect against ‘tax holiday’ jurisdictions. Further, there is a design and compliance task in setting the list and keeping it unto date (like our CFC ‘comparable tax’ list and ‘designated concession’ list). And geographic discrimination has its theoretical drawbacks too.
- Minimum amount of tax test – for a similar 5-year period, a non-resident might be subject to a minimum level of tax on their worldwide income. This would fix the ‘resident of no-where’ and ‘tax holiday’ problems. But the minimum rate would have to be set and the tax could be susceptible to override by double tax treaties. Also, there could be complications with local provisions (such as CGT event I1).
- UK system of taxing ‘temporary absences’ on their return – This applies to certain types of income and gains (eg. capital gains, distributions from closely controlled companies and certain pensions or lumpsum payments), after a ‘temporary absence’ – ie. on resuming residency (which lessens ‘collection risk’). For these purposes a ‘temporary absence’ involves all of the following.
- the individual was a ‘sole UK resident’ (viz: not a non-resident under any double tax treaty);
- for at least 4 of the last 7 years, the individual was a ‘sole UK resident’; and
- the period of non-residence is 5 years or less.
- Schemes to establish Australian residency – the Board notes that some aspects of Australian law might be favourable (our tax free thresholds, CGT discount, CGT rollovers, main residence exemption and withholding taxes) it is not aware of any schemes to utilise these and this probably has to do with the impact on worldwide income.
- United States: citizens and permanent residents tax on worldwide income – regardless of residency (requiring that status to be abandoned, to avoid that tax) and relying on foreign tax credits or double tax treaties to avoid double tax. This might be simple and effective but is widely regarded as harsh and could have collection and compliance issues (from those overseas – perhaps without local assets).
- United Kingdom: remittance based taxation – in the UK, a ‘resident non-domicile‘ remittance taxation system complements the statutory residency test (that is, not taxed in the UK until remitted) though this involves a further concept of ‘ordinarily resident’ and is a system not known to Australian tax law.
6. The superannuation test – The Board examines options for reform (but I will not summarise them here).
7. Part-year residency issues – considers it better to address the time at which residency starts and ends.
- Primary Test (time spent in Australia) – the rule might be:
- Commencement date – the time when the individual arrives in Australia (having not previously been a resident of Australia); and
- End date – the last day in which an individual is in Australia in an income year, where that individual was a resident for the entire previous income year.
- Secondary Test (factors test) – the individual may become, or cease to be, resident by factors other than being in Australia. The possible tests could be:
- The date on which the a factor was (or ceased to be) passed – flowing into the date on which the required number of factors or points fell above or below the residency test.
- Testing part years (before and after arrival) as if they were separate years – though the Board wished to consult on any ‘planning opportunities’ this might cause.
8. Transitional rules – might be necessary for affected individuals.
- Prospective application of the rules – would be satisfactory for most inbound and outbound residents (that is, physically arriving or departing).
- But rules that depend on prior year/period residency – might straddle the new provisions, necessitating transitional rules to avoid unexpected results.
CPD questions (answers available)
- Are the objectives of a revised individual residency rules: simplicity, certainty, residency that is easier to get than to lose and integrity?
- Are to objectives of the recommended new residency rules to reflect access to Australian citizenship; access to the Australian economy; and the benefits of physical location in Australia?
- Is the recommendation that a statement of these objectives would be in the statute?
- Would there be both a Primary (count the days) Test and a Secondary (multi-factor) Test?
- Would the Primary Test for residency be 183 days in Australia?
- Would the test for ceasing to be resident be the same number of days?
- Would the Secondary Test involve: (1) time spent in Australia; (2) immigration status; (3) family in Australia; (4) accommodation in Australia; (5) economic ties to Australia?
- Does Canada provide an example of how to align domestic residency law and that in double tax treaties?
- Does the ‘must be a resident of somewhere else’ a good answer to the ‘resident of no-where’ integrity problem?
- Does the Board recommend the Spanish 5-year embargo on losing domestic residency, on becoming a resident of a specified tax haven?
- Is the ‘minimum amount of tax on worldwide income’ a good answer to the integrity problem?
- Is the UK system of taxing certain types of income/gains, derived during ‘temporary absences’ on their return to the UK perhaps the best of the answers to the integrity issues?