Initial Report on Income Tax Residency

The Board of Taxation has released its initial report on income tax residency rules for individuals, recommending a two-step model to be introduced as a simplified residency test. In response, the government has asked the Board to further consult on the proposed measure.

In its self-initiated review, the Board considered:

  • • whether the existing Australian individual income tax residency rules that are largely unchanged since enactment in 1930:
    • – are sufficiently robust to meet the requirements of the modern workforce, and
    • – address the policy criteria of simplicity, efficiency, equity (fairness) and integrity.
  • • integrity concerns that came to the attention of the Board both prior to and during the review
  • • the increase in relevant litigation since 2009, and
  • • any changes that could be adopted to improve the residency rules.

The Board’s core finding is that the current individual tax residency rules are no longer appropriate and require modernisation and simplification. It also identified a number of associated concerns. eg, it is aware of an integrity risk where high wealth individuals manipulate the residency rules to become ‘residents of nowhere’, resulting in the avoidance of tax in Australia. The Board also considers that the ‘superannuation test’ no longer achieves its policy objective for government staff and their families.

The Board recommends replacing the current rules with an improved and simplified residency test as a two-step model as follows:

  • • a primary ‘days count’ bright line test that automatically determines the residency status of most individuals, and
  • • a secondary test taking into account individual circumstances, which leverages some existing case law, as well as international practices.

The Board concluded that further consultation will be necessary on the design of new residency rules. In particular, it will consider:

  • • options for two-step model for individual tax residency, and
  • • the integrity risk posed by ‘residents of nowhere’ and related schemes to circumvent the tax residency rules.

In response, the government supports the Board’s decision to undertake further consultation. The government said that it will consider the entirety of the Board’s work on this topic following the Board’s further consultation process, and in light of broader priorities.

Sources: Board of Taxation website and Minister for Revenue and Financial Services’ media release “Review of tax residency rules for individuals”, 9 July 2018.