Jet-setting executives could soon find themselves subject to dramatic changes to tax laws that would leave them with fewer options to argue whether they are an Australian resident for tax purposes.
The Turnbull government has been urged by its own tax advisory board to take a new approach to determining residency by throwing out most other complicated tests and instead basing it on a more simple “days count” test where a person is present in Australia for 183 days or more in a 12-month period.
While this 183 days test already exists, there are several other tests for determining a person’s residency. These include the “reside” test, the “domicile and permanent place of abode” test and the Commonwealth “superannuation funds test”.
The current definition of a resident was enacted in 1930, more than 80 years ago, at a time when most Australians did not have access to international travel.
The Board of Taxation in its review to government suggested following the lead of the United Kingdom and New Zealand which have tests that include “bright line” components into their residency rules, using a 183 “days count” test for inbound individuals.
Revenue and Financial Services Minister Kelly O’Dwyer has now asked the board to further examine how Australia could draw on residency tests in other countries.
“These are complex issues that deserve further analysis and consideration,” she said.
For outbound individuals, the board recommended individuals be considered non-resident if they work overseas and spend less than 31 days working, or 61 days total in Australia.
Former residents would become non-resident if they spend less than 16 days in Australia, and someone who has never been resident of Australia would remain a non-resident if they spend less than 46 days in Australia.
While the Board observed that “there is a risk of arbitrary and potentially inequitable outcomes should such a bright line test be set incorrectly, the Board considers that a ‘days count’ test is preferable to the current matrix of residency tests applicable to all individuals”.
The Board’s review also addressed the “resident of nowhere” scenario, which arises in situations where an outbound individual is no longer a resident but not legally qualified for residency under another country’s tax law.
Consultees to the review noted examples where some individuals seek to avoid tax by arguing that they are a resident of nowhere.
This indicates that the current outbound individual tests – in particular, the “domicile test” – no longer provide the integrity necessary in the Australian income tax system, the review said.
Tax Institute senior tax counsel Bob Deutsch said a more simple test was needed but that using the UK rules would be a backward step.
“The UK solution is an absolute disaster,” he said. “They have pages and pages of law [about] what hours count. I really wouldn’t want to see us go down that path. It would create so much litigation and so much complexity.”
The Board noted that disputes with the Australian Taxation Office and the need for the agency to issue private rulings have increased since 2009.
Since that date the ATO has issued hundreds of rulings, and more than 30 cases on these matters have been heard by courts and tribunals.
“This increases the cost to taxpayers and potential equity and integrity risks to the income tax system given the inherent uncertainty in the residency rules,” the review said.
It said tax agents had found it harder to give advice on residency issues, and the cost was higher. A basic letter of advice could cost between $5,000 and $10,000 per individual, it said.
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