Modernising Individual Tax Residency – Our Feedback

The tax residency rules for Australia were from 1936 – a very different environment to the world in which we Australian expats live and work in today. For the first time since then, the Australian Government is seeking to revise the tax residency rules and how they apply to global Australians, which could mark the most significant change to the tax residency framework we have seen.

The current rules have become have confusing for many Australian expats, so the opportunity to review, revise and update these rules to relate them to the way in which Australian expats operate today is very welcome. As Australian expats, it’s vital that we all have our say and that our feedback is heard – after all, nobody knows the Australian expat experience and challenges more than us expats ourselves.

We carried out a number of surveys with our clients, friends, and the Australian expat community and have summarised the submission of the responses to the Australian Government below. Thank you to everyone who participated in these surveys – it is with your responses and input that we can provide accurate and relevant feedback on the proposed changes.

Below is the summary of the responses that we received and a summary of the view taken for each of the questions raised in the Consultation Paper.

45 Day Threshold

1. How many days in an income year should an individual with strong connections to Australia be able to spend in Australia before they are considered a tax resident?

The current law confirms residency if a taxpayer spends more than 183 days in Australia. The proposed 45-day threshold is considered too short by the majority of survey respondents. Over 80% of those surveyed suggested that a range of 90 to 180 days would be more suitable, with the largest amount of support shown for the 180 day limit.

Many felt that the 45 day limit does not allow for situations such as an ill family member and creates unnecessary, stress, angst and confusion, not to mention the potential financial burden of this scenario.

Recommendation: The recommendation is a minimum of 90 days with specific exclusions or a minimum of 180 days if no exclusions are applied.

2. Do you consider that days spent in Australia under certain circumstances should be disregarded for the purposes of the 45-day count?

Recommendation: Yes, certain days should be excluded, such as government-imposed quarantine days that were experienced during Covid-19. Other days that should be disregarded include compassionate care of family, work-required travel, funerals, and visitation for parental visits.

Factor Tests

3. Could any of the four factors be defined differently to better achieve the design goals whilst remaining objective and identifiable?

The current 4-factor test is considered too simplistic. For instance, every Australian expat would meet the “Right to reside permanently in Australia” factor, making it easy for someone genuinely non-resident to be considered a resident.

Recommendation: The proposed factor test should be expanded with additional questions and a weighting score system rather than a simple yes or no response. This weighting score system would provide for a more equitable system that also provides greater transparency for non-residents of Australia wishing to carry out a self-assessment.

4. Are there other factors better suited to identifying individuals strongly connected to Australia in an objective, simple and certain way?

Factors such as the length of time you have already been outside of Australia, and if you’re separated from your spouse, who would be included in your immediate family if not divorced, were some of the key factors that were raised as areas that required greater clarity.

Recommendation: A weighted system is proposed that includes factors such as citizenship status, duration abroad, family location, type of accommodation abroad, value of Australian investments, and intended return time to Australia. This system provides a more nuanced and fair assessment of an individual’s connection to Australia.

5. How would any additional factors affect the proposed Factor Test, in particular the operation of the two-out-of-four aspect of the rule?

Many of the survey respondents suggested that the weighted score test would provide a far more fair assessment of an individual’s tax residency. For example, a different score could be applied based on the length of an individual’s employment contract overseas, when they departed Australia to live overseas, how long their Australian property is leased for (i.e. is it a short-term rental such as Airbnb, or is it a long-term lease of 12 months or more).

Recommendation: Implement a scoring system that weights different categories within each of the factors that have been outlined. This should include the following key aspects; when they plan to return to Australia, the percentage allocation of their global investments to Australian-domiciled assets, how many days per year they expect to be in Australia, where their immediate family resides, the housing situation in Australia, how long their overseas property lease is for, and the length of their overseas employment contract.

Commencing residency

6. Does having three points of connection (i.e. being physical present in Australia for more than 45 days in an income year, together with two factors) strike the right level of connection to commence residency?

The overwhelming response to this question was ‘absolutely not’. Previous case law and the current practices which outline the requirements for disconnecting with your previous country of residence, and re-establishing your ties to Australia are far more relevant here. These factors would include aspects such as; termination of your overseas employment, ceasing your lease or long-term accommodation arrangement in your previous country of residency, shipping your personal belongings and pets to Australia, children being enrolled in school in Australia, private health insurance being re-established in Australia, commencing employment in Australia, and of course the intent to remain in Australia for more than just the next 45 days.

Recommendation: The methodology based on the requirements outlined above should be retained and clarified for Australian expats, rather than the 45 days plus two factors being implemented.

Ceasing short-term residency

7. Does maintaining two points of connection to Australia (i.e. meeting two factors) strike the right level of connection to maintain residency in income years during which an individual is physically present for less than 45 days?

Recommendation: As per the feedback to question 6, this criteria we do not believe is sufficient to retain residency with Australia. Whereby the individual has the intent to remain outside of Australia for at least the next 2 years, and is not employed by the Australian Government, then they should be deemed to have ceased residency with Australia.

8. If not, how should the Ceasing Short-Term Residency Rule operate to strike the appropriate balance between adhesive residency, certainty and simplicity?

Recommendation: As per our answer to question 6, we feel the criteria outlined here is far more pertinent to assessing whether or not an individual has ceased residency with Australia.

Ceasing long-term residency

9. Does the Ceasing Long-Term Residency Rule strike an appropriate balance between increasing adhesiveness of residency for individuals with enduring ties to Australia while also providing a clear pathway to non-residency?

The survey respondents indicated that they were supportive of a model that provides greater clarity on how they can be sure that they have ceased residency of Australia. Many of the respondents to our surveys outlined that they have been outside of Australia for 5 years or more, with many indicating they’ve already been living offshore for greater than 10 years, and do not intend to return in the short-term.

Recommendation: Placing a limitation on visitation to Australia is reasonable in our opinion, however we believe that the exclusions should be applied and the number of days adjusted. With these changes, greater clarity on ceasing residency with Australia would be a welcome change.

Temporary residents

10. Is it appropriate to only treat a ‘temporary resident’ as a long-term resident if they have been a tax resident for six or more consecutive years?  (Note that other individuals will be treated as long-term residents if they have been a tax resident for three or more consecutive income years.)

The survey respondents did not have a strong view on this change, and felt that any changes to the tax treatment of different visa statuses should be reviewed with any immigration changes also. We do not believe that many temporary residents on a 6 year visa for example, would then extend this visa for a further 6 years, and instead would then look at either returning to their country of residency, or converting this to Permanent Residency via application in Australia.

Recommendation: We do not believe that this requires an overhaul.

Overseas employment rule

11. The Overseas Employment Rule allows individuals with enduring connections to Australia to immediately cease being a tax resident, thereby reducing the tax and compliance burden for those individuals and their employers. Do the settings strike the appropriate balance between facilitating the skill development of Australians through international experience while maintaining sufficient integrity?

Many of our survey respondents highlighted the fact that they were on open-ended contracts, which were typically 12 months and renewable. They also outlined that it was both theirs and their company’s intent for them to be living and working abroad for at least a 3 or 5 year period, however their company would not provide them with an employment contract of this length, as it is not considered standard practice. This proposed change also doesn’t seem to make mention of business owners who are looking to set up overseas.

Recommendation: We believe that this should be based on the intention of the individual employee, and not on the contractual terms of their employment. We also feel that the individual should be granted the opportunity to spend greater than 45 days in Australia, particularly in the first year of two of their overseas employment.

12. The effect of the Overseas Employment Rule is to cause the individual to become a non-resident (and provide certainty for employees and their employers) rather than to exempt the overseas employment income. Is this the appropriate outcome? 

Again, many of our survey respondents highlighted the common 12-month contract that they were on despite their intent to remain living and working abroad for 3 – 5 years, or in some cases even longer. Many also highlighted the fact that the Double Tax Agreement between Australia and their country of residence could impact the tax treatment of their income, which they felt required greater clarity.

Recommendation: Ensure that the overseas employment is based on the intent of the individual, allow for the inclusion of business owners here, and provide greater clarity on the tax treatment of income where there is no Double Tax Agreement in place.

Other matters

13. There will be a need for transitional rules when moving from the existing residency rules to the new framework. How would you suggest these transitional rules operate? For example, how should the Overseas Employment Rule apply to individuals who are already partway through their overseas employment at the time the new residency rules come into effect?

The most common response amongst many of those completing our surveys was that they felt that the rules that applied when they originally left Australia should continue to apply to them, as otherwise they could be worse off than when they made the decision to leave Australia. We feel that this is a reasonable response and that the new rules could apply to those leaving Australia from a certain date.

Recommendation: Have a clear date from which the new rules apply, with sufficient notice for those Australians considering opportunities offshore, and companies, and business owners considering international operations. Those Australians already living and working offshore should not be made worse off by the changes.

14. Do you have any other insights or observations to make about the framework?

Recommendation: We recommend that the following areas be clarified for the global Australian community should these changes be implemented.

Capital Gains Tax Calculations: For those Australian expats, that could easily be shifting from resident to non-resident if the 45 day count is not changed, and the factor tests are not adjusted, there needs to be clarity provided or exceptions granted for the calculation of capital gains tax. How can an Australian expat calculate the capital gains on shares they have purchased whilst living and working abroad if they are regularly switching from resident to non-resident status over time.

Main Residence Exemption: In addition to the above, if an expat transitions, greater clarity needs to be provided here on how this would impact their ability to claim the Main Residence Exemption on Australian property assets.

Focus on Clarity: Given that the clear purpose of this revision was to provide Australian expats with greater clarity, our hope is that the day count is increased, and Australians have greater confidence in their residency status moving forward.

As a voice for Australian expats across the globe, we certainly feel it’s important that our collective voice is heard in Canberra, and we hope to see that this feedback is included in any changes that are carried forward. We will be keeping everyone updated with any changes to the tax residency framework, and encourage you to follow our social media channels to stay informed.

To those who have shared their feedback and input on these proposed changes, again we thank you – without your feedback this submission would not have been possible.

Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.

Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.

Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.

General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.