In brief

In the 2021-22 Federal Budget, the government announced changes intended to simplify the tax residency rules for individuals.

The primary test under the new rules will be a so-called "simple bright line" test under which a person who is physically present in Australia for 183 days or more in any income year (i.e., the Australian tax year ending 30 June) will be an Australian tax resident. This represents a simplified version of the 183-day test used by some of our major trading partners such as the US. Even if an individual is not physically present in Australia for 183 days or more, they may still be a tax resident under secondary tests that depend on a combination of physical presence and what are proposed to be "measurable, objective criteria." The government is yet to release draft legislation, however the new individual tax residency rules are intended to apply from 1 July following Royal Assent.

The proposed changes will be based on the Board of Taxation's March 2019 report entitled "Reforming Individual Tax Residency Rules — A Model for Modernization." The report set out a number of tests, as follows:

  • The primary test is the 183 day test — if an individual spends 183 days or more in Australia, then they are a tax resident.
  • The secondary rules apply to individuals who are in Australia for more than 45 days but less than 183 days in an income year. The secondary tests would adopt a day-count together with a focus on four factors, two of which must be satisfied in order for that person to be deemed to be resident in Australia:
  • the right to reside permanently in Australia (e.g., citizenship or permanent residency)
  • the ability to access accommodation in Australia (e.g., rights of ownership, leasehold interests, licenses)
  • whether the individual's family (spouse or any of their children under the age of 18) are generally located in Australia
  • the individual's Australian economic connections (employment, carry on business, interests in Australian assets)

The report also included certain other proposals, such as an overseas employment rule, under which Australian tax residency would be lost where an individual is employed for a period of over two years overseas and certain other requirements are met. A key issue to remember is that, even if an individual is tax resident of Australia under Australian law, a tie-breaker provision of a double tax agreement may result in the individual being treated as tax resident of another country during a particular income year instead.