Australian Federal Budget 2021-22 - Test to determine tax residency

The Federal Budget contains the government's long-awaited response to the Board of Taxation recommendations in two reports:

• 'Review of the Income Tax Residency Rules for Individuals', (August 2017), and
• 'Reforming Individual Tax Residency Rules – A Model for Modernisation' (March 2019)

Why is this important?

Residency is one of the core pillars of the income tax system (the other being source of income). In broad terms, Australian tax residents are taxed on their worldwide income, whilst non-residents are taxed only on their Australian-sourced income.

Inbound expatriates, Australians strutting the world stage and employers managing a global mobile workforce will be keenly interested in the announcement.

What's wrong with the current legislation?

The Board agreed with many in the tax profession that the existing rules no longer reflect global work practices given the increasing frequency and nature of interactions with the tax residency rules, increased compliance burdens, and a rising number of disputes such as Harding v Commissioner of Taxation.

What did the Board of Tax recommend?

The Board recommended in its 2017 report that the government replace the current rules.

While stakeholders overwhelmingly supported the Board's conclusion, further consultation was considered necessary by the government.

Current tax residency rules no longer reflect global work practices

Building on its earlier work, the Board's 2019 report proposed:

• A Step 1 test for all individuals – where an individual who spends 183 days or more in Australia is a tax resident, supported by:
• Step 2 – more targeted, objective rules depending on each individual's circumstances, setting out clear criteria as to when an individual who is in Australia for less than 183 days in an income year commences or ceases residency.

What is the government's Budget response?

The government has agreed to implement the Board's two-step approach.

But the measure will not have effect until the first income year after the date of Royal Assent of the enabling legislation.

CA Budget Conversation Starters

Once the legislation is published in Bill form:

• Identify individual clients likely to be impacted by the proposed changes, as well as employers with globally mobile workers
• Using real-life client scenarios, consider how the new rules would change the way you advise on individual residency issues
• Bear in mind potential 'tiebreaker' tests in relevant Double Tax Agreements
• Flag the proposed changes in discussions with impacted individual clients or their employers.