On 7 June 2023, the Australian Taxation Office (ATO) issued final Taxation Ruling TR 2023/1, covering the tax residency tests for individuals inbound to and outbound from Australia.
In brief
The final ruling has been issued following consultation on its predecessor draft ruling (TR 2022/D2) and replaces and consolidates previous tax rulings on the residency status of individuals who are inbound to Australia (TR 98/17), leaving Australia to live overseas temporarily (IT 2650) and the residency status of business migrants (IT 2681).
The ruling discusses that Australian tax residency is determined based on an individual’s facts and connection to Australia, noting that two sets of similar facts may still have a different outcome due to differences in intention, motivation or life circumstances. Notwithstanding this, the ATO will look beyond the time spent in or out of Australia, and will look at surrounding income years for evidence to support a conclusion. To assist with this determination, the final ruling includes numerous additional examples to illustrate the ATO’s views on residency.
In detail
General principles on Australian tax residency
Under long established case law, an individual may be considered an Australian tax resident under “ordinary concepts”, which is “to dwell permanently or for a considerable time, to have one's settled or usual abode, to live, in or at a particular place”, which is in contrast to the individual's presence being temporary and casual.
The ordinary concepts test is generally relevant for an individual who is already physically present in Australia or who may have an intention to leave for a period of time however, there are a further three residency tests which expand upon the definition of tax resident:
- Domicile test
- 183-day test
- Commonwealth superannuation fund test
The Domicile test and Commonwealth superannuation fund test are generally relevant for individuals who have been in Australia, but are not currently living in Australia, whereas the 183-day test is relevant for individuals who were not previously resident in Australia and have entered Australia during the year. The Commonwealth superannuation fund test assumes less relevance now, given that the Government Superannuation Schemes mentioned have been closed to new members since 2005.
An individual who meets any one of the four tests will meet the definition of an Australian tax resident.
Key changes and clarifications
- The final ruling updates the views reflected in the earlier rulings to take into account recent Federal Court decisions concerning the application of the residency rules. These include:
- Harding v Commissioner of Taxation [2019] FCAFC 29 - where an Australian national, for the purpose of the ordinary concepts and domicile tests, ceased Australian residency even though he worked and lived in temporary accommodation in Bahrain, whilst regularly returning to Australia to visit his family. The decision confirmed in relation to the “permanent place of abode” test that it is not necessary to be living overseas in a particular dwelling in a certain way, in order for a place of abode to be considered permanent. This is provided that the nature of the presence in a town or country is consistent with abandoning residency in Australia and living in that town or country in a permanent way. As an extension to this, the ATO’s view is that a pattern of frequently moving around within a country can indicate that a person is travelling or have otherwise not commenced living permanently in that country.
- Commissioner of Taxation v Pike [2019] FCA 2185 - where a Zimbabwe citizen who lived and worked in Thailand, whilst visiting their de facto partner and child in Australia, was deemed an Australian resident under the ordinary concepts test. Generally speaking, working overseas but returning to Australia at intervals to an established family and social life will often mean an individual is still residing in Australia.
- Commissioner of Taxation v Addy [2019] FCA 1768 - where a UK national on an Australian Working Holiday Visa was not considered an Australian resident under the ordinary concepts test, as the fluid nature of her stay in Australia was akin to an extended holiday. The ATO’s view on this case is that a working holiday maker’s behaviour and connection to Australia is not usually consistent with residing here according to the ordinary concepts test and would usually also result in the person falling within the exception to the 183-day test (such that they would not be a resident of Australia under that test).
- In relation to the ordinary concepts test, the ATO has moved from all facts and circumstances being relevant to the determination of residency, to the test being focused on the intention, nature, duration and quality of the individual's physical presence in Australia and an intention to treat Australia as home. Factors that commonly inform the relevant association with Australia are:
- The period of physical presence in Australia;
- Intention or purpose of presence;
- Behaviour whilst in Australia;
- Family, business or employment ties;
- Maintenance and location of assets; and
- Social living arrangements
- A person does not cease to be a resident simply by absence; rather, the question is whether they have maintained a “continuity of association” with Australia which is in turn established by considering their other connections to Australia.
- The ordinary concepts test is not about dominance or exclusivity of residence in one place versus another, as it is possible to reside in more than one place at a time. However, the ATO acknowledges that a person's connections overseas are not irrelevant when assessing an individual’s connection to Australia, but can be used to inform the nature of the connections with Australia.
- In relation to the domicile test, if an individual departs Australia for an unspecified or substantial period, packs up their home in Australia, sets up a home in a foreign country and lives there with their family, whilst returning to Australia only occasionally, such as for: cultural events, special celebrations or annual leave, they are likely to have a permanent place of abode outside Australia. This is because they have abandoned Australia as a place of residency and commenced living permanently overseas. even though they may at some point intend to return to Australia. More difficult cases arise however, where there is frequent travel back to Australia, or where more time is spent back in Australia for reasons other than those outlined above.
- The ATO notes that a stay in short-term temporary accommodation as a precursor to finding suitable long-term or permanent accommodation would not normally indicate that the presence is not permanent.
- The final ruling maintains some basic rules of thumb which can assist when determining residency:
- For inbound individuals: A visit to Australia of less than six months is not usually sufficient time to be regarded as residing here. It is difficult for a person to establish a durable connection to Australia in this time.
- For outbound individuals: If the intended length of stay overseas is less than two years, a person is unlikely to be able to establish their permanent place of abode outside of Australia. However, whether a stay of two years or longer means that their permanent place of abode is outside of Australia will depend on the circumstances. The question is whether a person has in fact abandoned their Australian residency and commenced to live overseas in a permanent way.
- The final ruling includes an additional four examples that were not included in the earlier draft ruling to better illustrate the application of the principles set out above:
- Example 2 - person in Australia for eight months - resident
- Example 6 - person leaving Australia - non-resident when they depart
- Example 13 - business migrant coming to Australia - resident
- Example 17 - person in Australia takes a holiday overseas - resident
- The final ruling also considers temporary visitors to Australia and in particular, focuses on the importance of objective contemporaneous evidence. For example, the type of visa documents and statements given on passenger cards will often provide context for the individual's intentions, albeit they may not be a determinative factor. The ATO will also consider and give weight to objective circumstances surrounding a person’s arrival or departure. This includes what pre-existing arrangements they had, what they take with them and what they leave behind.
The Takeaway
It remains to be seen whether the current tax residency rules will be modernised, consistent with previous proposals and the “bright-line” tests as proposed by the Board of Taxation.
Unless, or until, there is any change to the individual residency tax rules, the holistic approach of analysing the individual's facts and circumstances remains the same. The final ruling does not reflect a change in the existing tax residency rules. Rather, it reframes the ATO’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.
On that note, individuals should obtain tax advice if they are uncertain of their residency, to ensure they remain compliant with their reporting obligations within Australia.
