Outdated Residency Rules Need to Change to Give Taxpayers Certainty


One of the most dramatic changes to tax laws in almost 80 years could be coming, and it’s not just jet-setting executives that could be impacted by it. It’s you and I.

If we travel for work, or spend extended time overseas and don’t pay tax here when we are gone, we could be hit.

If we are a “resident of nowhere” – that is a non-resident but haven’t established tax residency in another jurisdiction – the federal government may decide that we remain resident until tax residency is established elsewhere.

The government’s tax advisory board, known as the Board of Taxation, did a review into residency rules that were first enacted in 1930, and that change was among many it suggested.

In summary the review found that the residency rules “do not meet the objectives of simplicity, efficiency, equity and integrity” and require “reform as a matter of priority”.

It suggested the federal government commission a review of how individuals that reside overseas continue to access government services but are not subject to tax as Australian residents.

The Board also recommended that the government align individual tax residency rules and Australia’s immigration visa regime.

Revenue and Financial Services Minister Kelly O’Dwyer agrees the laws need simplification and has asked the board to further examine how Australia could draw on residency tests in other countries.

There are currently four tests for determining whether an individual is a resident: residence according to ordinary concepts (or the resides test); the domicile and permanent place of abode test; the 183 day test; and the Commonwealth superannuation fund test.

An individual is only required to pass one of these tests to be considered a resident of Australia.

The Board said words like ‘resides’, ‘permanent place of abode’, ‘usual place of abode’ and ‘domicile’ are antiquated legal concepts developed as part of British jurisprudence going back to the 19th century.

“None of these terms have fixed meanings,” it said. “Each relies on a different test of factors that, when evaluated holistically, determine whether an individual is a resident”

A recent court case involving former aircraft engineer Glenn Harding has highlighted the difficulty in determining a “permanent place of abode” in modern-day living.

Mr Harding lived in Bahrain for more than five years in the same block of fully-furnished apartments but a recent Federal Court decision rejected this as being his permanent place of residence.

Another case was highlighted in our recent joint Fairfax Media-Four Corners investigation into the ATO, where 67-year-old oil-field diver Michael Shord faced a six-year battle with the Australian Taxation Office and a hefty tax bill for arguing he was a non-resident for tax purposes.

Shord had been working overseas for years. Under Australian tax law before 2009, if someone worked overseas as an “employee” they were not taxed in Australia. That is so people weren’t taxed twice.

Shord relied on that, but failed in his Federal Court appeal. He has already spent thousands on legal costs and will have to spend thousands more if he wants to fight on.

The cases highlight the complexity of the law, the uncertainty that taxpayers face and the unlevel playing field in court battles.

The review said since 2009 there’s been more private rulings from the Tax Office – that is people contacting them to get a decision on whether they fit in within the definition of a non-resident – and more litigation from people arguing they were not a resident and therefore not subject to tax here.

Tax advice on determining residency is expensive and as the review noted, “costs can be disproportionate to the complexity of the taxpayer’s underlying tax affairs”. For example, a basic letter of advice could cost between $5000 and $10,000 per individual.

The review suggested replacing the existing residency definition with “new, enhanced principles- based rules”, which it said could be developed in consultation with other government departments and tax experts.

Residency could be determined on access to the privileges of Australian citizenship (such as security, medical and other services), access to the Australian economy (such as using the capital market, banking system, natural resources and the labour market ) and other benefits of physical location in Australia (home ownership and proximity to services and consumers).

While this statement would not create a legislative test, it would demonstrate the principles that underpin the residency rules and the government’s policy intention, it said.

The review also suggested separate statutory tests for inbound and outbound individuals.

For inbound, there could be a primary “bright line test” similar to existing New Zealand and United Kingdom inbound individuals tests that are based on 183 days count, being one day more than half a year.

For outbound individuals the test would be an individual that works full-time overseas is a non-resident if they spend less than 31 days working, or 61 days total, in Australia.

It also suggested for more difficult cases, should an individual not satisfy the primary test, having a second “objective one, based on an individual’s facts and circumstances”.

In reality this secondary test may not simplify things at all, and would bring us back to the status quo.

Clearly, there’s a lot more thinking the government will be doing before it makes dramatic law changes. But change is needed to give taxpayers greater certainty.


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