The Law Council of Australia (LCA) made a submission, dated 5 July 2020, to the Assistant Treasurer, about the announcements, in the 2021 Federal Budget, that the Government will move to change the ‘residency’ test, for ‘individuals’, based on the 2019 recommendations from the Board of Tax (see related TT article). The submission suggests various modifications, including to the ‘two factor’ test, which has relevance for both becoming a resident ceasing to be a resident.
See below for further details.
In the 2019 Board of Tax recommendations, the ‘two factor’ test had relevance for both becoming resident and ceasing to be resident.
- To commence being a resident, in an income year, you will be resident if you are in Australia and at least 2 of 4 ‘connection to Australia’ factors are present (though presence in Australia for at least 183 days, in an income year, also makes you resident).
- To cease being resident, you must spend fewer than 45 days in Australia, in an income year and have less than 2 of those same 4 factors present – though this is only if you have a resident for 2 or fewer consecutive income tax years (for those who have been resident for 3 or more consecutive income years, they must have been present in Australia for fewer than 45 days, in that, and the preceding two income years, to cease being a resident). In other words, it is easier to become a resident, than to cease (residency ‘stickiness’).
‘Two Factor’ test
The ‘two factor test’ is 2 or more of the following 4 factors.
- The right to reside permanently in Australia;
- Australian accommodation;
- Australian family; and
- Australian economic interests.
The LCA had previously proposed a more flexible ‘points test’ in its 2018 LCA Submission (see below).
Overseas employment rule
A person could also cease to be ‘resident’ under the ‘overseas employment rule’. This involves complying with the following 4 tests.
- Having been resident for the 3 previous income years.
- Being employed overseas with an employment period of at least 2 years.
- Having accomodation available, in the place of employment, for the entire period of the employment.
- Spending less than 45 days, in Australia, in each of the years of employment.
It doesn’t take much to see that there’s lots wrong with this test.
LCA submission on proposed new ‘residency’ test for ‘individuals’.
The submission is attached below.
The LCA submission assumes the Board of Tax framework and then suggests the following.
- Modification 1 (p.4) – Remove ‘right to reside permanently in Australia’, along with other fine tuning, such as: limiting ‘Australian Family’ to ‘spouse and children under 18, avoid double counting (such as a holiday house counting as both accomodation and an ‘economic interest’), and ‘accommodation available’ being normal residential accommodation (not hotels and other short-term accommodation).
- Modification 2 (p5) – Ceasing ‘residency’ should be assessed, only on the ‘short-term’ basis – namely less than 45 days in Australia that income year and fewer than 2 of the ‘factors’. This involves abandoning the ‘long-term’ test, which depends on not being resident for the 2 prior income years, pulls in much more revenue than the current residency test and would cripple importing work talent for, say, 5 years – as they’d be resident for 2 years after they leave.
- Modification 3 (p.6) – deal with the ‘resident of no-where’ problem with a separate anti-avoidance rule – rather than hurt everyone, with an overly ‘sticky’ ‘long-term resident’ rule. They suggest that a person would have to demonstrate they are a resident of another jurisdiction (within some period).
- Modification 4 (p7) – is (cutting to the chase) – to scrap ‘overseas employment rule’ as exception to residency and, instead introduce a broad income tax exemption, for foreign-source work-related income (as s23AG of the ITAA36 used to do).
The end result would be a well tuned ‘two factor’ test applying equally to becoming and ceasing residency, with the ‘resident of nowhere’ problem dealt with, through another rule (not an extended ‘sticky’ exit rule) and the ‘overseas employment rule’ would be removed from the residency test, in favour of a broad work-related foreign-source income exemption (that would only be required if there was more than 1 ‘connection with Australia’ factor).
2021 LCA Submission – tax residency for individuals
2018 LCA Submission – tax residency for individuals
This submission can be found here.