As part of its 2021–22 federal budget, the Morrison government announced that it will replace current individual tax residency rules with a new, double-pronged approach centred around a bright line test that addresses recommendations made by the Board of Taxation in 2019.
Scott Treatt, general manager of tax policy and advocacy at The Tax Institute, said that while the reforms may succeed in promoting competition, they remain needlessly complex.
“While the new test may allow for more certain outcomes, it also introduces a lot of complexity which needs to be worked through in order to reach that outcome,” Mr Treatt said.
“The tests bring certain challenges with respect to definitions and potential inconsistencies in particular scenarios.
“There may be more simple ways to resolve the perceived difficulties within the present individual residency rules which should be more fully explored with industry before simply accepting the Board of Taxation’s proposals.
“Essentially, the approach brings with it certain complexities which should be explored more fully before settling on an approach.”
The changes hinge on a two-step process, which begins with a bright line test whereby anyone who physically spends 183 days or more in Australia becomes a resident for tax purposes.
The Board of Taxation’s second step comes into effect when the first fails, and offers a “day count” and Factor Test solution to determine when a taxpayer begins and ends a period of Australian residency.
The Factor Test takes into account four secondary factors, of which only two need to be met for an individual to meet taxpayer criteria.
They are whether the individual has the right to permanent residency in Australia; whether they have Australian accommodation; if they have Australian family; or if they have Australian economic connections.
Others have raised questions over the omission of detail, and the government’s failure to introduce reforms to tax residency rules that fully address all of the recommendations made by the Board of Taxation in 2019.
However, still, the changes are viewed as a positive step in the right direction, said Jonathan Ortner, a partner at law firm Arnold Block Leibler.
“While the announcement is light on detail and does not appear to address all of the observations and recommendations by the Board of Tax,” Mr Ortner said, “it should be seen as a step in the right direction, and I am hopeful that this is the start of a broader process of simplifying our residency rules for individuals.
“Although, as always, the devil will be in the detail.”
Mr Ortner said the reforms will relieve taxpayers who move and work across borders of much of the uncertainty and complexity that current tax residency rules impose.
“In its current form, the Australian tax residency rules for individuals have long caused taxpayers uncertainty, are complex and outdated, and are arguably no longer fit for purpose,” he said.
“The case for change is strong, especially as the rules no longer reflect global work practices in an increasingly global, mobile labour force. They impose an inappropriate compliance burden on many taxpayers which is problematic under a self-assessment tax regime.
“The uncertainty in applying the rules is leading to an increased level of disputes and requests for private rulings. COVID-19 has only exacerbated this problem, with many individuals currently stuck in Australia and now uncertain about their tax residency status.”
CPA Australia’s manager of external affairs, Jane Rennie, said that a string of tax reforms announced in Tuesday’s budget, like those related to tax residency, are effective — to some degree — in enhancing Australia’s global competitiveness.
“These changes go some way to enhancing Australia’s attractiveness as a place to work and invest,” Dr Rennie said. “In a globally competitive economy, the true test will be how they stack up against other jurisdictions.”
Mr Treatt said that while the measure might boost Australia’s competitive edge cosmetically, it emerges as a piecemeal approach, when universal changes could be more effective.
“The final outcome will likely be that more individuals will be treated as a tax resident,” Mr Treatt said. “The government clearly sees this as a part of a range of measures to support innovation, growth, and attracting and keeping valuable IP on Australian shores.
“This is a wonderful economic goal, but holistic reform of the system is a much more effective way to reach it than piecemeal changes.”