How to Prepare for the Changes to Australia’s Tax Residency Laws

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Author: Dean Crossingham

 

Introduction

On Tuesday 11 May 2021, the Treasurer Josh Frydenberg delivered the Australian Government’s 2021-22 Federal Budget. In his budget speech, the Treasurer announced that, following the height of the COVID-19 pandemic, “Australia’s economic engine is roaring back to life”.

Among the key measures budgeted by the Treasurer, to fuel Australia’s economic recovery, is the proposed modernisation of Australia’s tax residency laws.  The purpose of this modernisation is to provide greater certainty and reduce compliance costs for globally mobile individuals and their employers.

As with any proposed change of law, it is important to plan ahead in order to utilise any opportunities or mitigate any potentially adverse consequences. This is particularly significant for Australian expatriates working in a foreign country where any changes may have an immediate impact.

 

Background

Your tax residency status can have a significant impact on your overall Australian tax liabilities. Your residency status affects whether you:

  • pay tax in Australia on your world-wide income;
  • are eligible for the low-income tax-free threshold;
  • can access the 50% capital gains tax (CGT) discount and other CGT concessions;
  • must pay the Medical Levy; and
  • will be subject to Australia’s non-resident withholding taxes.

Despite the significance of your tax residency, it is generally acknowledged that the governing laws are now obsolete. Australia’s tax residency laws were enacted on 1 July 1930, during an era when international travel was only a novel concept. For instance, it was on 17 April 1935 when Qantas flew Australia’s first international passenger flight, from Brisbane to Singapore, carrying a total of two paying customers.

 

Proposed changes

As with any federal budget announcements, in the first instance the proposals therein are made cursorily. Observers must then wait with bated breath as to whether the correlating bill will be introduced to parliament, let alone given royal ascent and made as law.

However, notwithstanding the usual parliamentary processes, it is expected that the modernisation of Australia’s individual tax residency laws will resemble the following:

 

Primary Rule

An individual who spends 183 days or more in Australia in the current income year will be an Australian tax resident.

 

Secondary rule for individuals who are commencing their residency

A commencing residency individual is a resident of Australia where the individual is present in Australia for 45 days or more in an income year and satisfies additional criteria.

 

Secondary rule for individuals who are ceasing their residency

This rule is made up of three separate tests:

  1. The long-term resident test;
  2. The short-term resident test; and
  3. The overseas employment test.


How it may affect expatriates who own Australian property

Owning an Australian property will bear significance to Australian expatriates under the additional criteria of the secondary rule concerning individuals who are commencing their residency.

As the proposed rules currently stand, if you are an Australian citizen or permanent resident and you own Australian property, you will satisfy these additional criteria. Further, the proposed use of the property will not alter this outcome, for example, if it is left vacant, used privately or rented out.

This means that, for those affected expatriates, greater emphasis will be had on your travel itineraries and whether you may be present in Australia for 45 days or more in an income year.

 

How it may affect expatriates who are ceasing their residency

Also of particular relevance to Australian expatriates is the Overseas Employment Test which forms part of the secondary rule for individuals who are ceasing their Australian residency.

The proposed Overseas Employment Test provides that an individual will cease residency on the day after departure from Australia if they:

(a) are an Australian tax resident for the three consecutive income years prior;

(b) undertake employment overseas that is mandated to be for a period of more than two years at the time employment commences;

(c) have accommodation available continuously in the place of employment for the duration of their employment; and

(d) return to Australia for less than 45 days in each income year that they continue their overseas employment after the year in which they depart.

 

What should I do next?

These proposed changes to Australia’s tax residency laws will come into effect prospectively. As such, it is important for those potentially affected individuals to engage in proper planning to both understand and manage their Australian tax obligations going forward.

Recommended planning includes forecasting your international travel and work plans across the coming years to initially determine:

  • For everyone: if you will be in Australia at least 183 days in an income year; and
  • For incoming and outgoing individuals: if you will be in Australia for at least 45 days in an income year.

For those expatriate Australians presently living and working overseas, recommended planning includes a review of:

  • the tenure of your overseas employment term and whether you are contracted for a minimum of two years; and
  • your overseas living arrangements and whether you will have continuously available accommodation during your overseas employment tenure.

The outcome of the above considerations should provide you with invaluable guidance as to whether further thought, planning and actions should be taken as to any potential change of your Australian tax residency status.