Proposed New Tax Residency Rules – Federal Budget

Proposed New Tax Residency Rules – Federal Budget

The key change for Australian expats announced in the 2021-2022 Federal Budget was the proposed changes to the Australian individual tax residency rules.

The proposed changes to the residency rules are based on the Board of Tax recommendations made in March 2019.  The Board of Tax recommended that the current rules are outdated, overly complex and need to be modernised to reflect modern work practices.

The Board of Tax recommended a two – step approach.

1. Income year commences, and if an individual resides in Australia for a duration of 183 days or more, they will meet the tax residency requirement, also referred to as the primary ‘bright line test’.
2. People who fail to satisfy the 183-day clear-cut examination might still qualify as an Australian tax resident through various additional assessments. The secondary tests are to be based on objective criteria, for example, where an individual has the right to reside permanently in Australia, whether they have Australian accommodation, Australian family or Australian economic connections.

The proposed rules also outline an ‘overseas employment rule’ that would apply to an individual who relocates overseas for employment. In this scenario, the person could be classified as a non-resident when they move abroad, taking up overseas employment for a period exceeding 2 years and securing permanent housing in the foreign country. They would also need to spend less than 45 days in Australia under the proposals.

The significant alteration proposed, which affects individuals living abroad, pertains to the scenario where a person stays in Australia for 45 days or longer and possesses ties to Australia. In scenarios like these, they might conceivably qualify as tax residents in Australia. This impact may be significant- especially for taxpayers who reside in a country where Australia does not have a tax treaty (for example, Hong Kong or the UAE).

More Information about Proposed New Tax Residency Rules

If the most recent rules are implemented, it is crucial to consider the consequences in accordance with the relevant dual taxation agreement.This agreement aims to distribute tax responsibilities to the nation where the person works and possesses a stable lodging option. This will be of particular importance, especially where a taxpayer is a ‘dual tax resident’ of Australia and the country where they carry out employment.

Prior to offering detailed guidance to our clientele regarding the potential consequences of the forthcoming residency regulations, it will be imperative for us to meticulously evaluate and deliberate upon the preliminary legal framework once it becomes available from the authorities. Murphy Tax Lawyers and Advisors will also be submitting a response to the Exposure Draft once released.

A proposal has recently surfaced, suggesting that the new residency guidelines will go into effect in the fiscal year following the approval of the law. To illustrate, if the law gets ratified prior to June 30, 2022, it will come into force as of July 1, 2022. It’s crucial to acknowledge that the Tax Board has acknowledged the potential necessity of a transition period.

Please do not hesitate to get in touch with us if you have any questions in relation to the proposed new rules.

I hope everyone is well and take care!