In 2016, the Board of Taxation initiated a review of Australia’s individual tax residence rules. This resulted in a final report in which it recommended a complete rewrite of the rules. Justifications from the Board of Taxation for seeking to replace the current law included that it is “no longer appropriate for the 21st century”, and that it is deficient in espousing the tax policy objectives of simplicity, certainty, equity, and integrity. The proposed reform was subsequently endorsed by the previous Australian government in the 2021-22 Federal Budget and is now subject to a consultation process with the current Australian government.
The proposed rewrite would substantially change the individual tax residence rules. It would have a significant impact on Australia’s personal income taxation system, and it may alter Australia’s jurisdictional claim (that is, who should and who should not be a tax resident). In this context, our research contribution is an analysis of the proposed reform, by applying these rules to the facts of existing case law on individual tax residence. This analysis may assist policymakers in evaluating whether the proposed rules are a better alternative than the current law.
The proposed reform is a significant departure from the existing law on individual tax residence. Whereas the existing tests reflect a principle-based ‘facts and circumstances’ approach, the proposal sets out a prescriptive set of new rules and introduces new categories of residents.
The proposed rules
The proposal commences with a simple days-count test of a taxpayer’s physical presence in Australia. Where a taxpayer is present in Australia for 183 days or more in an income year, they will be a resident under the test. Where the taxpayer is not a resident under this test, and they are not a government official deployed overseas, either a commencing residency test (where the taxpayer was not a previous resident), or a ceasing residency test (where the taxpayer was a previous resident) is considered next.
A taxpayer will be a resident under the commencing residency test where they stay in Australia for at least 45 days (and up until 182 days) in an income year and satisfy two of four given “objective” factors. These factors are the right to reside permanently in Australia, Australian family, Australian accommodation, and Australian economic connections.
Different ceasing residency tests apply, depending on whether the individual is a short-term resident (a tax resident for less than three consecutive income years), a long-term resident (a tax resident for more than three consecutive income years), or an individual who is long-term resident and travels overseas for work (known as the ‘overseas employment rule’).
The table below sets out the results of our analysis, where the proposed rules were applied to the facts of the cases listed. In several of the cases we analysed, the residence status of the taxpayer changed upon the application of the proposed rules. Generally, where the taxpayer was a non-resident under the current law, they would become a resident under the proposed rules.
Application of the proposed rules to existing cases
| Case | Current law | Proposed rules |
|---|---|---|
| Pike | Resident of Australia (non-resident under the Double Tax Agreement) | Resident and non-resident |
| Harding | Non-resident | Resident |
| Joubert | Resident | Resident |
| Dempsey | Non-resident | Resident or Non-resident |
| Handsley | Resident | Resident |
| Addy (working holiday maker) | Resident (on a technicality) | Resident |
| Stockton (working holiday maker) | Non-resident | Resident |
| Coelho (working holiday maker) | Non-resident | Resident |
Our analysis of how the proposed rules would operate suggests that they would alter Australia’s jurisdictional claim. However, there is no clear rationale from policymakers on why this is the case. Moreover, the proposed reform does not appear to have originated from a statement from policymakers on what is Australia’s jurisdictional claim.
Pike was one of the cases we analysed where the taxpayer’s residence status changed upon application of the proposed rules. The court applied the “resides” test and concluded that the taxpayer was a resident of Australia. However, for the purposes of the Australia-Thailand double tax treaty, the taxpayer was found to be a non-resident of Australia.
In our application of the proposed rules to Pike, we found that there was complexity in navigating through a matrix of tests to determine the taxpayer’s residence status. The taxpayer’s residence status fluctuated from being a short-term resident, initially, to a long-term resident, then to a non-resident of Australia, and then back to a short-term resident of Australia. This is because a change in the pattern of the taxpayer’s physical presence in Australia changed the taxpayer’s resident category and eventually rendered the taxpayer a non-resident for two income years, even though his family and personal circumstances did not change during the income years in question.
The proposed primary test, while simple, does not consider the relevant circumstances of the taxpayer. This departure from the current facts and circumstances approach would appear to have produced an arbitrary residence outcome under the proposal.
A similar example of this phenomenon was apparent in our analysis of Harding. Under current law, the “quality and nature” of the taxpayer’s physical presence was a significant factor in the full Federal Court’s conclusion that the taxpayer was not a resident of Australia.
By contrast, under the proposal, merely exceeding the threshold of 45-days presence in Australia would change the conclusion on tax residence. The taxpayer was deemed to be a tax resident of Australia.
Given that the proposed rules appear to be informed by aspects of the United Kingdom’s statutory residency test, we compared these. Although both the UK test and the proposal are intended to promote simplicity, the UK statutory residence test does not disregard the nuances and complexities that arise in determining individual tax residence, as the proposed rules appear to be doing.
Conclusion
The claimed benefit of increased simplicity of the proposed rules was not apparent in our case analysis. In this context, the case for a rewrite of current law appears diminished.
The current law may be considered simple for a large proportion of taxpayers who can easily determine that they are residents. Evidently, this is not the case for taxpayers whose circumstances are more complex, and who will need to engage with the residence rules for this reason.
The proposal however, appears to require a higher proportion of taxpayers to engage with the rules, and this would, by itself, increase complexity. Comparisons of the current law and the proposal should consider this, as well as whether the proposal would increase or diminish equity, given the change in residence determinations that would ensue.
We argue that the reform of the individual tax residence rules should not commence with their abolition and replacement. Rather, the existing approach in Australian tax law of amending the law as required, appears to be a better alternative. An alternative perspective is to recognise that a degree of complexity is unavoidable in individual taxpayer residence, as the UK statutory residence test appears to have done.
Journal article
Verma S. and Minas, J. (2023), What is the future of individual tax residence under the proposed rules? Australian Tax Forum, 38(1): 51-90.
Interesting article.
Does anyone know when this proposal will heard in parliament.
Thank you!
The proposed reform is still undergoing consultation. The outcome of the consultation will let us know whether the current Government wishes to proceed with the proposal or not.
Therefore it is unknown at this stage as to whether the proposal will even reach parliamentary stage.
Thank you for your reply Swapna.
I noticed many articles indicate that current residency rules are problematic due to certainty. I am wondering why many years this has not been addresses by paliment or why they have not address these issues.
Sensible article. The current case law is not as silly as the proposed “reforms” try to make out. Once again, we “progress” in “tax reform” from anomaly through inequity to further anomaly and further inequity.