On 9 July 2018, the Board of Taxation released a report submitted to the Minister of Revenue and Financial Services following the self-initiated review of the current individual tax residency rules originally commenced in May 2016 (Report).
The Report explores the legal rules that apply to determine the residency status of individuals for income tax purposes. In preparing the Report, the Board considered a number of factors including whether the existing rules introduced in 1930:
- are sufficiently robust to meet the requirements of the modern workforce and
- address the policy criteria of simplicity, efficiency, equity (fairness) and integrity
In summary, the Report concludes that the existing residency rules are no longer appropriate as the fundamental basis of individual income taxation. Among other things, this conclusion reflects the complexity faced by taxpayers seeking to apply the current rules.
Broadly, the Report notes that the Board identified a number of concerns with the current regime, including:
- the existence of integrity risks where high wealth individuals manipulate the residency rules to become ‘residents of nowhere’ and
- the general mismatch of the current rules (stemming from principles introduced many decades ago) with the modern remuneration environment.
The recommendation proposed by the Report is to replace the current rules with:
- a clear a policy statement, such as an objects clause that outlines policy objectives (i.e. equity, efficiency, simplicity and integrity)
- a definition for ‘resident’ that:
- includes a primary ‘days count’ bright line test that automatically determines residency and
- where the primary test is not satisfied, provides an additional test which takes into account the individual circumstances of taxpayers, and which leverages some existing case law and international practices.
- a rule that maintains Australian residency unless tax residency is proveably established in another jurisdiction and
- a more effective rule for the Government’s position regarding public services.
The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, has asked the Board to consult further on key recommendations, including how Australia could draw on residency tests used in other countries. The Board will be undertaking this consultation in the coming months.