Self-initiated Review of the Income Tax Residency Rules for Individuals
In May 2016, the Board commenced a self-initiated review of the current individual tax residency rules.
The report explores the rules that apply to determine the residency status of individuals for income tax purposes. More specifically, 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;
- 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 litigation relating to the residency rules since 2009; and
- any changes that could be adopted to improve the residency rules.
The Board established a working group of Dr Mark Pizzacalla (Chair), Board Chair Michael Andrew AO and external adviser Rosheen Garnon. The Working Group was assisted by officials from the Department of the Treasury and the Australian Taxation Office. The Board would like to express its appreciation for the assistance provided by these officials.
The Board’s core finding is that the current individual tax residency rules are no longer appropriate and require modernisation and simplification.
The Board also identified a number of associated concerns. For example, the Board 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. The Board’s preferred approach, detailed in the report, is 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.
However, while many stakeholders supported this approach, the Board acknowledges that a variety of views exist. The Board concluded that further consultation will be necessary on the design of new residency rules.
The Board completed its review of the Income Tax Residency Rules for Individuals in August 2017 and provided a copy to Government.
The Government has responded to the Board. In its response, the Government supported the Board undertaking further consultation to ensure that the proposed residency rules can be appropriately designed and targeted, with particular focus on the integrity of the residency rules.
The Government has not taken a position on the recommendations in the Board’s report. The Government 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.
In accordance with the Government’s response, the Board will be undertaking consultation in the coming months.
The Board’s consultation will include:
- options for a 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.
If you would like to be consulted, please contact the Board of Taxation Secretariat at email@example.com or (02) 6263 4366 to express your interest.