Updated Tax Ruling on individual tax residency tests
The long awaited tax ruling on individual tax residency has been released which consolidates and replaces previously withdrawn rulings and has been updated to reflect important Court decisions. The ruling does not incorporate the proposed changes to the residency tests announced by the previous Government as a response to the Board of Taxation’s recommendation to introduce a “bright line” residency test. The concept of residency remains largely the same as reflected in previously withdrawn rulings, with some slight adjustments.
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The ATO has finally released its long awaited ruling on individual tax residency, TR 2023/1, which outlines the ATO’s latest views on determining whether an individual is a resident of Australia for tax purposes. The ruling consolidates and replaces previous rulings on individual tax residency that had been withdrawn and also makes updates to take into account developments in case law including Harding v Commissioner of Taxation [2019] FCAFC 29, Commissioner of Taxation v Pike [2020] FCAFC 158 and Commissioner of Taxation v Addy [2020] FCAFC 135.
Residency tests
According to the ruling, an individual is a resident of Australia if the ordinary concepts test is met or any of the domicile, 183 day, or Commonwealth superannuation fund tests are met.
Ordinary concepts or resides test
Under the ordinary concepts test, an individual is a resident if they reside in Australia. Reside is not defined and has its ordinary meaning, which has been expressed as “to dwell permanently or for a considerable time, to have one’s settled or usual bode, to live, in or at a particular place”. The ordinary concepts test attempts to determine whether an individual’s presence in Australia is usual and settled in contrast to temporary and casual.
Determining whether an individual is a resident under the ordinary concepts test depends on the nature, duration, and quality of the individual’s physical presence and an intention to treat Australia as a home. Factors include:
- the period and intention of physical presence
- behaviour while in Australia
- family/business/employment ties
- maintenance and location of assets
- social and living arrangements
Other tests of residency
The ruling also explains the other three tests for determining whether an individual is an Australian tax resident. These are as follows:
- Domicile test – an individual whose domicile is in Australia is a resident, unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia;
- 183 day test – an individual who has actually been in Australia, continuously or intermittently, during more than one half of the year of income, unless the Commissioner is satisfied that the person’s usual place of abode is outside of Australia and that person does not intend to take up residency in Australia; and
- Commonwealth superannuation fund test – an individual with membership of certain Commonwealth government superannuation schemes, or their spouse/children under 16.
Place of abode
In the ruling, the concept of “place of abode” has been updated to reflect the decision in Harding v Commissioner of Taxation to not only refer to a dwelling but also to physical surroundings in which the individual lives, extending to a town or a country. Therefore, it is no longer necessary to be living in a particular dwelling in a certain way for an individual’s place of abode to be considered permanent, provided the nature of the individual’s presence in a town or country is consistent with abandoning residency in Australia and living in that town or country in a permanent way.
For practical purposes, the ruling retains the rule of thumb that if an individual’s intended length of stay in another country is less than two years, they are unlikely to be able to establish that their permanent place of abode is outside of Australia (i.e. they are more likely than not to remain an Australia resident). Those with longer stays will need to examine their individual circumstances, the ruling notes that the critical question is whether a person has in fact abandoned Australian residency and commenced to live in a permanent way overseas.
Working holiday makers
Following the decision in Commissioner of Taxation v Addy, the ruling now specifically states that working holiday makers will not usually be considered to be a resident of Australia under any of the residency tests, particularly where they enter and remain in Australia on a working holiday visa, or work and holiday visa, and leave at the end of (or before) that visa expiring.
Impact of double tax agreement tie-breaker tests
In relation to the decision in Commissioner of Taxation v Pike, the ATO maintains that double tax agreement (DTA) “tie-breaker” tests that apply to allocate income to one or both countries by allocating residency to one country for an income year (or part of) only affect the allocation of income. Therefore, even if a DTA allocates your residency to another country under the tie-breaker test, an individual will remain a resident of Australia for Australian tax purposes and will be taxed on that basis to the extent it is not inconsistent with the allocation rules in the specific DTA.
Proposed unlegislated changes to residency tests not included
It is important to note that the ruling does not incorporate the proposed changes to the residency tests announced by the previous Government in the May 2021 Budget, in response to a 2019 Board of Taxation report on modernising individual tax residency rules.
The key proposal from the report was a primary “bright line” physical presence test (i.e. if you spent 183 days or more in Australia in the income year you are a resident), and a secondary test based on the individual’s prior year residency status (commencing/ceasing residency tests) that takes into account further information if the primary “bright line” test is not met.
None of these proposals have been legislated.
Need help determining your tax residency?
As the cases demonstrate, determining tax residency is not always straight forward and may often require legal advice.
If you aren’t sure about your tax residency status for Australian tax law purposes and the potential implications of the new ruling on your personal situation, contact us today for advice and assistance.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.