Tax on an individual’s worldwide income is dependent on their Australian tax residency. Determining tax residency of an individual is complex and based on a largely subjective interpretation by the Commissioner and the courts’ application of the statutory tests for residency of individuals as set out in subsection 6(1) of the Income Tax Assessment Act 1936.
On 7 June 2023, the ATO released TR 2023/1 to provide updated guidance on how the Commissioner would apply the residency tests for individuals. The ruling replaces and consolidates prior residency rulings (namely: TR 98/17, IT 2650, and IT 2681) and contains 18 examples of the application of the residency rules. TR 2023/1 also seeks to incorporate the interpretation of the law in recent case law, including but not limited to:
- Harding v Commissioner of Taxation [2019] FCAFC 29 (Harding);
- Pike v Commissioner of Taxation [2019] FCA 2185 (Pike); and
- Addy v Commissioner of Taxation [2019] FCA 1768 (Addy).
Residency for tax purposes is a question of fact based on an individual’s connection to Australia. The first three tests relevant to individual taxpayers are the ordinary concepts test, the domicile test and the 183-day test. The fourth test, the Commonwealth superannuation fund test, is relevant to select government employees.
The Ruling also explains that residency is about your connection to Australia. An individual is a resident if they meet any one of the tests. This means that we must consider all applicable tests before concluding an individual is a non-resident.
Importantly, the Ruling states that “..residency under the first 3 tests is determined by considering all of your relevant facts and circumstances…. Because of this, there are no ‘bright-line rules or any single factor that can be said to be paramount.”
TR 2023/1 states that the period of physical presence or length of time in Australia is an important factor, but it is not a determinative factor. It is the individual’s intention, purpose or reason for being in Australia that helps to determine whether they are a resident.
The Ruling is silent on the former Government’s May 2021 budget’s announcement to propose new residency rules based on a two-tier test recommended by the Board of Taxation. The primary test proposed was there being a ‘bright line test’ where a person physically present in Australia for 183 days or more was considered an Australian tax resident without the need to consider other factors.
It would appear that the Commissioner, in stating that there are “no bright line rules” in TR 2023/1 is asserting the importance of considering the nature, duration and quality of a person’s physical presence and an intention to treat Australia as home in determining residency. Factors considered relevant in determining association with Australia in addition to an individual’s period of physical presence in Australia are:
- 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.
The Ruling provides eighteen examples applying these factors to assist in assessing an individual’s Australian tax residency position and the broad 2 year ‘rule of thumb’ assists in determining when a length of overseas stay is substantial for the purpose of considering whether a taxpayer’s permanent place of abode is overseas.
Overall, whilst the incorporation of recent Federal Court decisions recognizing globalisation and flexible working arrangements is welcomed, a lack of certainty and clarity in law remains. The subjective interpretation of the domicile test and the 183-day test still hinges on the Commissioner being satisfied that all of an individual’s facts and circumstances support their residency status.
It is clear that continued engagement between the ATO and the tax community is necessary to move forward on a residency assessment framework that considers the ongoing nuances of today’s global and mobile workforce whilst supporting Australia’s taxing equitability.