The board released an initial report on its self-initiated review into Australia’s income tax residency rules on 9 July.
Through the review, the board considered whether the existing rules, which are largely unchanged since they were enacted in 1930, were sufficiently robust to meet the requirements of a modern workforce.
Further, it looked at whether the existing rules were “simple, efficient and fair”.
The key finding from the review was that that the current rules do require modernisation and simplification.
It also identified opportunities for tax arbitrage, for example where individuals become “residents of nowhere” when they leave Australia and do not become tax residents of another jurisdiction.
The complexities of Australia’s current tax residency rules were recently highlighted in a Federal Court ruling. The case concerned a man who has not lived in Australia since 2009, had an apartment in Bahrain but was still deemed to technically be a resident of Australia.
Two-step model needed
To bring the rules into the 21st century, the report recommends a simplified residency test that follows a two-step model.
The first step is a basic “day count” test that automatically determines the residency status of most individuals.
With a second step taking into account individual circumstances, which leverages some existing case law, as well as international practices.
Australia’s minister for revenue and financial services, Kelly O’Dwyer, said the government has welcomed the report into the “complex” tax issue.
“Before the government takes any position on these matters, I have asked the board to consult further on key recommendations, including how Australia could draw on residency tests in other countries.”
