TR 2023/1 finalises the Commissioner's view on tax residency for individuals but promised Government reform yet to come.
- The ATO released TR 2023/1 – Income tax: residency test for individuals – on 7 June 2023 after a period of public consultation on the draft ruling TR 2022/D2 released last year.
- The finalised ruling replaces and consolidates three prior ATO rulings following several Federal Court appeal judgments handed down in 2019 and 2020 that considered residency for individuals.
- Reform to the residency rules for individuals was recommended by the Board of Taxation in 2017 and announced by the former Government in 2021, but since then there has been no further announcements.
Residency is a key element of Australia's taxation system, but the implications of the statutory tests remain uncertain and subject to interpretation by court decision and the Commissioner. The guidance in the recently released TR 2023/1 reflects the developments that have occurred in the law since the prior ruling in TR 98/17, with a number of high profile Federal Court decisions concerning residency handed down in 2019 and 2020. While this ruling consolidates old rulings and provides updated guidance to taxpayers in light of the court decisions, there remains significant uncertainty in the application of the rules and this raises the need for reform.
Updated guidance issued by the ATO
TR 2023/1 sets out the Commissioner's interpretation on the statutory rules of residency for individuals, as well as providing a number of examples to assist taxpayers self-assessing their residency status. It follows a draft ruling, TR 2022/D2, issued on 6 October 2022 for public comment.
The ruling replaces and consolidates the following ATO rulings:
- IT 2650 (residency – permanent place of abode outside of Australia);
- IT 2681 (residency status of business migrants); and
- TR 98/17 (residency status of individuals entering Australia).
IT 2650 and TR 98/17 were withdrawn by the draft ruling, with effect from 6 October 2022. The finalised ruling clarifies that IT 2681 has also been withdrawn, with effect from 7 June 2023.
The guidance reflects the updated view of the Commissioner on the four tests for residency of individuals as set out in subsection 6(1) of the Income Tax Assessment Act 1936. The first three tests relevant to individual taxpayers are the ordinary concepts test, the domicile test and the 183-day test. The fourth test, the Commonwealth superannuation fund test, is relevant to select government employees. The Commissioner states that no single fact determines the outcome and the significance of facts varies from case to case. Because of this, there are no 'bright-line rules' or any single factor that can be said to be paramount.
The ruling was likely prompted by a number of Federal Court appeals handed down in 2019 and 2020 that dealt with the residency test for individuals, and it has been drafted to incorporate the interpretation of the law in those decisions:
- Harding v Commissioner of Taxation  FCAFC 29;
- Commissioner of Taxation v Pike  FCAFC 158; and
- Commissioner of Taxation v Addy  FCAFC 135.
The Commissioner has also made a number of changes to the position reflected in the draft ruling to address public feedback:
- in relation to the 'ordinary concepts test' the Commissioner has moved from all factors and circumstances being relevant, to the test being informed by the nature, duration and quality of a person's physical presence in Australia and their intention to treat Australia as home;
- recognition of flexible working – with business or employment ties overseas being of less significance if the business or employment can be, and are, performed from anywhere in the world;
- the Commissioner's view that non-residents may return to Australia occasionally for events like Christmas has been expanded to recognise cultural events, special celebrations and annual leave; and
- the Commissioner will apply the marginal income rates applicable to residents to a person who was a resident for at least one day during the income year.
The ruling also includes an additional five examples that were not included in the draft ruling to assist taxpayers determine their residency status. The ruling also usefully maintains the two year "rule of thumb" to assist in determining when a length of overseas stay is substantial for the purpose of considering whether a taxpayer's permanent place of abode is overseas.
Overall, while the new ruling incorporates the recent Federal Court decisions, the application of the statutory rules remain uncertain. A significant contributor to this uncertainty is the fact that the domicile test and the 183-day test, which are the clearer tests from the statute, still turn on whether the Commissioner is 'satisfied' of certain points.
Residency for foreign incorporated companies is also subject to the same issues of uncertainty, but is not dealt with by this ruling. The Commissioner's interpretation of the residency test for companies is found in TR 2018/5 and PCG 2018/9 (with the transitional aspects of that PCG ending 30 June 2023, which may cause significant issues for some groups).
Expected legislative reform
Changes to the long standing tax residency rules for individuals have been anticipated since the Board of Taxation (Board) finalised its review into the rules in 2017 and gave its report to the Government in 2019.
The former Government's May 2021 budget included a measure to modernise Australia's individual tax residency rules based on the Board's report. The measure contained a two-step test for individuals:
- the primary test – a 'bright line' that a person who is physically present in Australia for 183 days or more is an Australian tax resident; and
- the secondary test – for those who do not meet the primary test, a combination of physical presence and objective criteria to determine residency.
The measure was intended to have effect from the first income year after enabling legislation was passed. However, since then draft legislation has not been announced and a change in government has occurred. Subsequent budgets have not included the reform measure.
Board of Taxation report
While the budget measure was light on detail, especially on the secondary test, the Board's report contained a detailed model for the modernisation of the rules. The report recommends the same two-step test for residency, with the primary test being the same 'bright line' 183 day test.
The secondary test proposed by the Board consists of a 'commencing residency' test and a 'ceasing residency' test. The two tests are applied depending on whether a person was an Australian tax resident in the previous income year.
Both components of the secondary test refer to four factors:
1. Right to reside permanently in Australia
2. Australian accommodation
3. Australian family
4. Australian economic interests
A person commences residency in Australia when they were not a resident in the previous income year, spend 45 days or more in Australia, and satisfy 2 or more of the factors. If the person meets the commencing residency test, the Board recommends they are a resident from the day they arrive.
A person ceases to be a resident if:
- they meet the overseas employment rule;
- for a short-term resident (a person who has been a resident for less than three consecutive income years), they spend less than 45 days in Australia and satisfy no more than one of the four factors; or
- for a long-term resident (a person who has been a resident for three or more consecutive income years), they spend less than 45 days in Australia in an income year and less than 45 days in Australian in each of the previous two income years.
The overseas employment rule is designed for Australians working overseas for a period of two years or more. The person must have accommodation overseas for the entire employment period, and cannot spend 45 days or more in Australia for each income year in which they are employed overseas.
The Board's proposal has the effect that:
- if a person has resided in Australia for 183 days or more, they are an Australian tax resident; and
- if a person has resided in Australia for 45 days or more but less than 183 days, they may be an Australian tax resident subject to satisfying the recommended factors.
It is unclear to what extent the Government will implement the Board's proposed rules. The secondary test in the May 2021 budget was left relatively vague, although the former Government's proposal for a combination of 'physical presence' and 'objective criteria' mirrors the Board's commencing and ceasing residency rules.
The Government has also not commented on the other aspects of the Board's review. The Board recommended significant changes to the temporary residency rules, subjecting temporary residents to non-resident income tax rates if the residency rules were modernised and otherwise limiting the temporary resident tax concession to individuals who have been in Australia for less than 4 years. These changes would have a significant tax consequence for temporary residents living in Australia.
It is yet to be seen whether changes to the individual tax residency rules are on the Government's agenda. The new ATO ruling clarifies the Commissioner's interpretation of the residency tests, but the rules still require taxpayers to work with tests which have uncertain implications which, in some cases, turn on the Commissioner being 'satisfied' of certain points. The mid-cycle budget expected in the last quarter of the year, or the May 2024 budget, provide opportunities for the Government to re-announce the modernisation of the rules.