New Tax Residency Rules – A Breakdown for Australian Expats

Are you an Aussie living abroad, uncertain about the latest tax residency regulations and their impact on your fiscal responsibilities?

Recently, the Australian Taxation Office (ATO) announced fresh instructions concerning tax residency rules under Taxation Ruling TR 2023/1, superseding earlier guidelines. This new ruling integrates pertinent case law, providing much-needed clarity on an individual’s residency status.

In this blog, we’ll dissect these updated tax residency guidelines for Australian expats, accentuating the pivotal points in the ATO’s instructions and addressing frequently occurring misunderstandings.

TR 2023/1 – The Key Determinants of Tax Residency

Using the “resides” test or “ordinary concepts”, the ATO appraises several factors to determine tax residency:

• Physical Presence Duration: The period of stay in Australia is a significant determinant in the tax residency assessment.
• Intention Behind Presence: The motive or intent behind an individual’s stay in Australia, whether transient or long-term, is evaluated.
• Conduct in Australia: An individual’s conduct while in Australia, including their involvement in business, employment, and social activities, is assessed.
• Connections with Australia: An individual’s family, business, and employment ties to Australia are scrutinised.
• Asset Maintenance and Location: The upkeep and location of an individual’s assets, such as properties, investments, and personal belongings, are considered.
• Social and Living Conditions: An individual’s social and living arrangements in Australia, including homeownership or rental agreements, are factored in.

While the ATO hasn’t assigned specific weights to these factors, their importance varies on a case-by-case basis. Each situation is evaluated uniquely, and the ATO retains the right to assign weightings as deemed appropriate.

Myths Regarding Tax Residency

Over the years, we have heard some questionable myths when it comes to Australian tax residency. As part of our ongoing commitment to educating and empowering Australians across the globe, and we’ll debunk a few below:

• 183-Day Rule: Many erroneously believe that absence from Australia for 183 days within a year automatically designates non-residency for tax purposes. This rule is only one of four residency tests; satisfying just one is enough to be considered a tax resident. Furthermore, even after spending 183 days or more in Australia, one might still fail the test if their “usual place of abode” is overseas.
• 45 Days in Australia: Some incorrectly believe that less than 45 days’ stay in Australia automatically accords non-resident status. While the Board of Taxation’s review proposed a “bright line” test of 45 days, it doesn’t carry legal weight. The ATO’s ruling underscores that the relevant factors should be scrutinised to determine whether an ongoing connection with Australia exists, even with less than 45 days in the country.
• Tax Residency Resumption Date: When tax residency is resumed is another common point of confusion. There’s no predefined period to regain residency; an individual becomes a resident the day they meet one of the four residency tests. Residency status can change the day an individual switches from satisfying at least one test to none. Intent and duration are critical when determining tax residency.

Anticipated Legislative Reforms

Following the Board of Taxation’s review in 2017, changes to the tax residency rules for individuals were expected, but no legislative reforms have been announced. Recent budget announcements have excluded the proposed reform measure. Despite outlining a two-step test for residency in the budget measure, it remains unclear whether the government intends to implement the Board’s suggestions.

Looking forward, the government’s implementation of the proposed rules remains uncertain. The absence of legislative change suggests that updates to residency rules may not happen in the next 12 months. Hence, it is crucial for individuals to stay informed and seek expert advice regarding their residency status.

Let’s consider a few different case studies.

Case Study 1: 12 Months Stay in Australia – Resident

Take the case of David, a music coach from the United States, who accepted a 12-month contract with a professional orchestra in Melbourne. Leaving his family behind in the U.S., David moved to Melbourne with only his personal effects. He signed a one-year lease for an apartment in the Melbourne CBD. His days were filled with rehearsals with the orchestra, gym workouts, and weekend performances at concerts and a local church.

David’s family came to visit him over the holiday season for a brief trip. Upon the conclusion of his 12-month contract, David returned to his family home in the U.S. Throughout his time in Melbourne, David’s actions and connections established that he was residing in Australia, thus meeting the ordinary concepts test for residency despite his family remaining in the U.S. In this case, David would be liable for tax in Australia throughout this 12 month period.

Case Study 2: Away from Australia for 5 years – Non-resident

Reflect upon the situation of Isabella, a notable cardiologist from Sydney, Australia. She was offered the position of Director of Cardiology at a renowned hospital in Tokyo, Japan, for a duration of 5 years, with an option for extension. Isabella relocated her spouse and children to Japan, disposing of their cars and belongings, and let their Australian home on an annual lease. The family moved into an apartment close to the hospital in Tokyo after a month of residing in temporary hospital-provided accommodation. Her husband secured a job at a local marketing agency, while her children began attending an international school nearby.

Despite Isabella and her family’s annual one-month Christmas holiday visits to Australia, their permanent residence was firmly established in Tokyo. With her long-term move to Japan, Isabella disconnected her ties to Australia, making her a non-resident as per ordinary concepts and domicile tests.

Case Study 3: Away from Australia for 2 years – Non-resident

Consider the case of Joseph, an Australian national and software engineer, who was transferred to India for a two-year project. He went to India alone due to ongoing marital issues. A month into his stay, his marriage officially ended. Joseph was captivated by the vibrant Indian culture and decided to start a new chapter of his life there, with no immediate intentions of returning to Australia. He secured a permanent position in a tech firm in Bangalore, sold his vehicle in Australia, and initiated the process of selling the home he co-owned with his ex-wife. He became an avid participant in a local cricket league.

Over the two years, Joseph visited Australia twice – the first time was to gather his belongings post-divorce, and the second time was to attend his mother’s funeral and deliberate the future of his mother’s bakery. A month after returning for his mother’s funeral, Joseph resigned from his Indian job to manage his family’s bakery in Australia on a full-time basis.

Joseph’s Australian residency was considered terminated when he resolved not to return and severed his ties with Australia. However, he regained his Australian residency status once he decided to stay permanently after his mother’s demise. Under the domicile test, he was deemed a non-resident from the moment he acquired an apartment in Bangalore until he returned to Australia after his mother’s death.

Conclusion

Establishing tax residency can be intricate and demands careful scrutiny of individual circumstances. The ATO’s recent directive, Taxation Ruling TR 2023/1, offers crucial insights into the factors considered when appraising tax residency for Australian expats. Understanding common misinterpretations, such as the 183-day rule and the 45-day threshold, is essential, and acknowledging that tax residency can change based on intent and duration.

For queries about your tax residency status or assistance with expat tax returns, it’s advisable to consult specialists familiar with the latest ATO guidance, case law, and private rulings. We can aid in discerning your current position, introduce you to the right professionals, and ensure compliance with tax residency regulations.

It’s vital for Australian expats to understand the tax residency rules to accurately meet their tax obligations and prevent future complications. Stay knowledgeable, seek expert advice, and maintain compliance with the latest regulations.

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.