Draft Taxation Ruling TR 2022/D2 - ATO’s reinterpretation of individual tax residency rules
7 October 2022
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On 6 October 2022, the Australian Taxation Office (ATO) issued draft Taxation Ruling TR 2022/D2 covering the tax residency tests for individuals inbound to, and outbound from, Australia.
In brief
This draft ruling replaces and consolidates previous tax rulings on the residency status of individuals who are inbound to Australia (Taxation Ruling TR 98/17), or leaving Australia to live overseas temporarily (Taxation Ruling IT 2650).
Important to note, this draft ruling does not reflect a change in the existing tax residency rules. Rather, it reframes the Commissioner of Taxation’s view of those rules and how they should be applied to an individual’s facts and circumstances, particularly in light of recent case law developments (such as Harding v Commissioner of Taxation [2019] FCAFC 29).
The Board of Taxation has acknowledged that the current residency rules do not reflect global work practices, and impose an inappropriate compliance burden on many taxpayers in all but the simplest of cases – this has led to increased uncertainty and disputes. This draft ruling attempts to provide greater certainty to taxpayers.
In detail
The draft ruling retains the six-month rule of thumb for inbound individuals when considering whether they reside in Australia, and the two-year rule of thumb for outbound individuals when considering whether they have a permanent place of abode outside Australia. However, even in these cases, there must still be a careful consideration of the facts and circumstances.
The ATO notes that each residency decision turns on its facts. While Court and Tribunal decisions provide illustrations of how the Court or Tribunal has considered and weighted facts, an outcome in one case does not govern the outcome in a different case, even where the facts are similar.
In light of the Harding decision, the ATO has updated its discussion regarding the application of the permanent place of abode test to include the Court’s expanded definition of ‘place of abode’ beyond a bricks and mortar dwelling to a town or country.
The Harding case concerned an individual who moved between apartments in a building in Bahrain in a regular pattern, while he was based in the Middle East. One of the examples in the draft ruling seeks to illustrate the application of the expanded definition of ‘place of abode’ by referring to an individual who moves between apartments and through various countries to take up short-term employment opportunities. The ATO’s conclusion in that example is that the individual has not established a permanent place of abode outside of Australia and would be a tax resident.
The draft ruling provides additional guidance in relation to applying the residency tests to temporary workers in Australia under certain government schemes, and working holiday makers in response to decisions such as Addy v Commissioner of Taxation [2019] FCA 1768.
There is also further guidance around complicated outbound residency cases. These outbound cases typically involve situations where an individual retains some ties remaining in Australia, such as continued family connections or maintaining assets in Australia (such as a house or furniture) and have caused the most uncertainty for taxpayers due to the fact that the outcomes are dependent on the facts of the particular case.
The ATO gives the example of an individual who moves overseas, but their family will follow six months later when the children finish the school year. In the example, the individual could become a non-resident of Australia, as their remaining connections of Australia are remnants of prior residency and are not consistent with ongoing residency.
The Takeaway
It remains to be seen whether the current Government will continue with the previous Government’s proposals to replace the current tax residency rules with “bright-line” tests as proposed by the Board of Taxation.
In the meantime, there is no “bright-line” test for determining an individual’s tax residency which the Commissioner of Taxation has reiterated in the draft ruling. This means that residency must be determined according to the individual’s facts and circumstances, with every factor being relevant but not determinative on its own.
When the final Ruling is issued, it is proposed to apply both before and after its date of issue. Comments on the draft ruling can be provided by 26 November 2022.
