Australia – Draft Tax Residency Ruling

On 6 October 2022, the Australian Tax Office (ATO) published a draft taxation ruling on the residency tests for individuals.¹

In the absence of legislative changes to the Australian individual tax residency tests, the draft ruling seeks to consolidate the views reflected in earlier rulings and consider developments in case law.²

The ATO is inviting comments to the proposed draft ruling which are due by 25 November 2022. 

There has been no update on the announcements made in May 2021 (by the previous federal government) regarding the reform of Australia’s individual tax residency tests and proposed adoption of the Board of Taxation’s recommendations in its report.³  This draft ruling does not discuss any legislative changes and the current law remains. (For prior coverage, see GMS Flash Alert 2021-142, 12 May 2021.)

Who Is a Tax Resident of Australia?

Australia’s current tax legislation outlines four tests to determine tax residence. An individual is regarded as a tax resident of Australia if he or she satisfies one or more of these tests.       

The draft ruling seeks to provide updated guidance on the Australian Tax Commissioner’s views on three of these tests and how they should be applied to an individual’s facts and circumstances. As there is no bright-line test, differences in intention, motivations and life circumstances may produce different outcomes. The draft ruling provides that no single fact determines the outcome, and the significance of facts varies from case to case.

We have highlighted below some observations and key take-aways regarding the ATO’s updated views on each of the three key tests discussed in the draft ruling.⁴

Resides / Ordinary Concepts Test

An individual will be a tax resident if he or she “resides” in Australia under ordinary concepts. This requires an assessment of the individual’s presence and connection to Australia. Factors of note to consider are:

—   Length of time or period of physical presence in Australia – This is an important factor but not determinative. The draft ruling retains the rule of thumb that a visit to Australia of less than six months is generally not of a sufficient length of time to be regarded as residing in Australia. 

—   Intention and purpose of presence – The draft ruling appears to place significant emphasis on the individual’s intention and purpose for being in Australia. Objectively observable factors and behaviour and contemporaneous statements about intent and purpose (such as those included on passenger cards and visa documentation) would be relevant. In addition, when the original intention towards being in Australia changes, this can alter an individual’s Australian tax residency status.

—   Behaviour consistent with residing in Australia – The manner in which the individual lives may demonstrate that the individual is residing in Australia if it reflects a degree of continuity, routine, or habit.

—   Family, and business or employment ties – Many individuals may be required to work overseas but return to Australia at intervals to resume a pre-existing, established family and social life. This will often indicate that the individual is still residing in Australia.  Even though an individual has foreign employment, if there is an ongoing, deliberate connection to Australia, it is likely the individual will remain a tax resident and will not be regarded as a mere visitor to Australia.

Domicile / Permanent Place of Abode Test

—   For Australian-domiciled individuals to not be considered a tax resident, the Commissioner must be satisfied that their permanent place of abode is outside of Australia. The focus here is on whether the individual has abandoned residency in Australia and commenced to live in a permanent way overseas (acknowledging that “permanent” does not mean forever).

—   It is helpful that the two-year rule remains and has been re-stated. When the intended length of stay overseas is less than 2 years, the individual is unlikely to be able to establish that that his or her permanent place of abode is outside of Australia.5

—   In line with the Harding case,6 the ATO has confirmed that the expression “place of abode” refers to the physical surroundings in which the individual lives, extending to a town or country, and the focus is not necessarily on a particular bricks-and-mortar dwelling. Provided that the nature of the individual’s presence in a town or country is consistent with both abandoning residency in Australia and living in that town or country in a permanent way, a permanent place of abode could be established.

—   The draft ruling has provided further guidance on more complex outbound individual situations where that individual undertakes employment overseas but maintains ties to Australia, such as family and assets in Australia. Generally, when there appears to be no abandonment of Australia as the place of residence due to maintenance of connections to Australia, an individual will remain a tax resident. This is regardless of whether more time is spent overseas than in Australia in any given income year.

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