Change in residency tests – impact on globally mobile employees

The rules which will apply from the first income year after the date of Royal Assent replace the existing Australian residency rules which were first enacted 85 years ago and are becoming unfit for purpose in a global working environment.

This has been brought further into the spotlight in the past 18 months with COVID 19 leading to stranded expatriate employees caught in Australia or their home jurisdictions uncertain of their tax residency positions due to complex residency rules and contradictory case law providing inconsistent guidance.

How have the Residency Tests changed?

The principal focus of the new rules is on a two-step simplified approach consisting of;

1. Primary 'bright-line test' – this test will consider the time spent in Australia (i.e. ‘day count’) to automatically determine the residency status of the majority of individuals where that are in Australia for a minimum of 183 days; and
2. A secondary test – known as the 'factor test'. Under this test, and for each “factor” an individual satisfies, they can be considered to have a higher level of connection to Australia.

The Secondary Test

Whilst no new details were announced in today’s budget, the 2019 Board of Taxation report to Government Reforming individual tax residency rules — a model for modernisation, which has laid the foundations for today’s announcement included the following ‘factor tests’:

• Time Spent in Australia – including a 45 day de-minimus
• Immigration/Visa Status
• Family location
• Australian Accommodation
• Economic ties.

Importantly the framing principle of the above application of the Factor Tests is the adhesiveness principle. That is, residency is harder to cease than it is to commence.

How will this impact

The proposed changes to the residency rules were necessary and will provide greater certainty on an individual’s residency status and bring Australia more in line with other OECD nations’ application of tax residency tests. However, it is still important to recognise;

• There is still a degree complexity and application required under the secondary ‘factor tests’ which will need to be considered and analysed in further detail.
• Many individuals who have relied on the current rules will need to review their current situation to see how these changes may impact there position.
• Individuals should still consider the overarching application of the Double Tax Agreements that Australia has in place with over 40 jurisdictions which will ultimately determine tax residency.

Federal Budget 2021-22

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