On 7 June 2023, the Australian Taxation Office (ATO) issued its finalised ruling TR 2023/1 (the Ruling) which contains the Commissioner of Taxation’s views on the tax residency of individuals. The Ruling was issued following a period of public consultation on the draft ruling (TR 2022/D2).
The tax residency status of an individual is critical in determining the extent to which the ATO can impose tax on that individual. This is because Australian tax residents are assessed on their worldwide income, from all sources, whether inside or outside Australia. In contrast, a non-resident is generally assessable only on income from Australian sources.
The new Ruling addresses recent court decisions and gives recognition to the increased global mobility of employees when determining tax residency, given the prevalence of global working arrangements which was further heightened during the COVID-19 pandemic.
The Ruling contains the Commissioner’s updated views on the following three residency tests for individuals set out in subsection 6(1) of the Income Tax Assessment Act 1936:
- the ‘ordinary concepts’ test;
- the ‘domicile’ test; and
- the ‘183-day’ test.
The fourth test, being the ‘Commonwealth superannuation fund’ test, is excluded from the Ruling given its limited application, and as the relevant superannuation schemes to which it applies are closed to new members.
While the Ruling provides clarity on various aspects of the residency tests, it is still necessary to undertake a thorough, holistic review of an individual’s way of life to reach a view on their tax residency. Importantly, the Commissioner states that “no single fact determines the outcome and the significance of facts varies from case to case. Because of this, there are no ‘bright-line rules’, or any single factor that can be said to be paramount”.
As a result, the rules remain complex to apply, with no certainty afforded to individuals on their residency status.
Statutory residency tests
An individual is a resident of Australia if:
(a) the individual ordinarily resides in Australia (the ordinary concepts test);
(b) the individual’s domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia (the domicile test);
(c) the individual has actually been in Australia, continuously or intermittently, for more than 183 days in the income year, unless the Commissioner is satisfied that the person’s usual place of abode is outside Australia and that the person does not intend to take up residence in Australia (the 183-day test); or
(d) the individual is a member of a superannuation scheme established by deed under the Superannuation Act 1990, or an eligible employee under the Superannuation Act 1976, or the spouse or a child under 16 of the aforementioned persons (the Commonwealth Superannuation test).
An individual will be a resident if they meet any one of the tests; it does not matter if the individual does not meet any of the other tests.
In particular, the Ruling expands on the ‘ordinary concepts’ test and the ‘domicile’ test, which are discussed below.
The ordinary concepts test
Under the ordinary concepts test, an individual is a tax resident if they ‘reside’ in Australia. This test seeks to ascertain whether the individual’s presence in Australia is usual and settled, in contrast to temporary and casual.
Under the Commissioner’s previous view, it was necessary to consider ‘all the facts and circumstances’ when determining an individual’s residency status. The Commissioner has moved away from such a broad approach to a more specific focus, where the residency of an individual is informed by both the nature, duration and quality of the person’s physical presence, and an intention to treat Australia as home.
The Commissioner notes the following factors commonly inform if an individual has a relevant ‘association’ with Australia:
- period of physical presence in Australia;
- intention or purpose of presence;
- behaviour while in Australia;
- family, and business or employment ties;
- maintenance and location of assets; and
- social and living arrangements.
No single factor is decisive, and the weight given to each factor varies depending on individual circumstances.
The Commissioner considers that in many cases, a visit to Australia of less than six months is ‘not sufficient to be regarded as residing here’. This is a slight shift in the ATO’s view, whereas under its previous ruling (TR 98/17) the Commissioner considered that six months ‘is a considerable time’ when determining an individual’s residency status. This indicates that if an individual is in Australia for six months, it is not necessarily the case that the ATO may consider them to be a tax resident, which was arguably more likely under the former guidance.
The Ruling states that the presence of family in Australia, and the extent of business or employment ties overseas, will be relevant in giving context to an individual’s connection with Australia. Interestingly, the Commissioner states that business or employment ties overseas may be less significant if they can be, and are, performed from anywhere in the world.
In Federal Commissioner of Taxation v Pike (Pike), a Zimbabwe citizen who lived and worked in Thailand for an indefinite duration was held to remain a resident of Australia, as he travelled regularly to Australia to reside with his de facto wife and children. This was despite the individual’s unpredictable patterns of visits to Australia, being as short as 32 days in one year, and as long as 155 days in another year.
In response to Pike, the Ruling states that generally speaking, working overseas but returning to Australia at intervals to an established family and social life will often mean that the individual is still residing in Australia; this is the case even if the individual spends more time overseas than in Australia in any given year.
Domicile test
The domicile test most commonly applies to Australian citizens who are living overseas. Under this test, an individual is an Australian tax resident when their domicile is in Australia, unless the Commissioner is satisfied that the individual’s ‘permanent place of abode’ is outside Australia.
The concept of ‘domicile’ is a legal term that refers to an individual’s country of origin. Broadly, a person’s domicile will be their country of birth, however they may acquire a new domicile if they are physically present in a foreign country and take steps to make their home indefinitely in that country – such as by applying for a permanent residency visa.
A person will have a permanent place of abode outside of Australia when they have commenced ‘living permanently’ overseas. If an individual departs Australia for a ‘substantial period’, sets up a home in a foreign country and returns only occasionally such as for cultural events, special celebrations, or annual leave, they are likely to meet the description of someone who has commenced living permanently overseas. As a ‘rule of thumb’, the Commissioner considers that a length of stay overseas of less than two years will not be sufficient to establish a permanent place of abode outside of Australia.
It is not necessary that an individual lives in a particular dwelling overseas for their place of abode to be considered permanent, provided they are living in the same town or country in a permanent way. For example, in Harding v Commissioner of Taxation, an Australian citizen who worked and lived in short-term apartments in Bahrain for several years, while often returning to visit family in Australia, was held to have a permanent place of abode overseas. In that case, while the taxpayer lived in various apartments, he lived permanently in a specific country rather than moving between foreign countries.
The Commissioner considers that staying in temporary accommodation such as hotels, campsites, a ship cabin, or accommodation arranged by an employer with non-exclusive access, usually indicates the individual’s presence overseas is not permanent. These comments seek to address the Commissioner’s views, contained in several private rulings, that individuals working abroad luxury vessels do not have a permanent place of abode overseas, as the accommodation on each vessel is of a transitory nature and the individual does not have exclusive access to the vessel.
Comment
While the Ruling further clarifies the ATO’s views on the residency tests, taxpayers do not have certainty as to how these tests may apply to their specific circumstances. This is because the outcome of most of the tests are highly dependent on the Commissioner being ‘satisfied’ of various matters, and each residency decision will turn wholly on its facts.
In the Federal Budget 2021-22, the former government announced it would replace the individual tax residency rules with a new, modernised framework. The primary test would be a simple ‘bright line’ test – a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident. Individuals who did not meet the primary test would be subject to secondary tests, which would examine physical presence and other specific criteria.
The current government has not yet addressed this proposed reform, and it has not been included in recent Budgets.
The introduction of a ‘bright line’ test will be a welcome contrast to the current tests which are difficult to apply and highly dependent on the specific facts of each case. Under the current tests, as stated in the Ruling, there are no ‘bright-line rules’ – an outcome in one case does not govern the outcome in a different case, even when the facts are similar.
Australia’s self-assessment system places the responsibility on the taxpayer to comply with taxation laws. When determining their tax residency status, taxpayers will need to make assumptions about the way in which the Commissioner would apply the residency tests, based on the individuals’ particular facts and circumstances. This exercise can be fraught with difficulty as it requires individuals to stand in the shoes of the Commissioner and reach a state of ‘satisfaction’ on various matters.
The Ruling notes an individual ‘should take a reasonable view’ as to how the Commissioner will regard various matters in the tests. If the ATO considers that a taxpayer has not taken a ‘reasonable view’, it has the ability to impose penalties of 20% on any tax shortfall for failure to take reasonable care. In these circumstances, further clarity regarding the application of the tests to afford protection to taxpayers would be welcomed.
Contact us
If you would like to have a discussion regarding your tax residency status, or have queries regarding the application of Australia’s residency tests, please contact our Tax team.
References
Commissioner of Taxation v Pike [2020] FCAFC 158
Harding v Commissioner of Taxation [2019] FCAFC 29
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