ATO Releases Updated Ruling on Individual Residency
The ATO has finally released its long-awaited ruling on individual residency which outlines the ATO’s latest views on whether an individual is a resident of Australia. This ruling consolidates and replaces previous rulings on residency that have been withdrawn as well as updates the views contained within to take into account various decisions such as Harding v Commissioner of Taxation [2019] FCAFC 29, Pike v Commissioner of Taxation [2019] FCA 2185, and Addy v Commissioner of Taxation [2019] FCA 1768. According to the Ruling, an individual is a resident of Australia if the ordinary concepts test is met or any of the domicile, 183-day, or Commonwealth superannuation fund tests are met.
Ordinary Concepts Test
Under the ordinary concepts test, an individual is a resident if they reside in Australia. Reside is not defined and has its ordinary meaning, which has been expressed as “to dwell permanently or for a considerable time, to have one’s settled or usual bode, to live, in or at a particular place”. The ordinary concepts test attempts to determine whether an individual’s presence in Australia is usual and settled in contrast to temporary and casual. Determining whether an individual is a resident under the ordinary concepts test depends on the nature, duration, and quality of the individual’s physical presence and an intention to treat Australia as a home. Factors include period and intention of physical presence, behaviour while in Australia, family or business or employment ties, maintenance and location of assets, and social and living arrangements.
Other Residency Tests
The ruling also explains the other 3 tests for determining whether an individual is an Australian resident.
Domicile Test
An individual whose domicile is in Australia is a resident unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia.
183-Day Test
An individual who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that the person’s usual place of abode is outside of Australia and that person does not intend to take up residency in Australia.
Commonwealth Superannuation Fund Test
An individual with a membership of certain Commonwealth government superannuation schemes, or their spouse or children under 16.
Updated Meaning of Place of Abode
In the ruling, the concept of place of abode has been updated to reflect the decision in Harding v Commissioner of Taxation to not only refer to a dwelling but also to physical surroundings in which the individual lives, extending to a town or a country. Therefore, it is no longer necessary to be living in a particular dwelling in a certain way for an individual’s place of abode to be considered permanent, provided the nature of the individual’s presence in a town or country is consistent with abandoning residency in Australia and living in that town or country in a permanent way.
Practical Application of the Residency Tests
For practical purposes, the ruling retains the rule of thumb that if an individual’s intended length of stay in another country is less than two years, they are unlikely to be able to establish that their permanent place of abode is outside of Australia, meaning they are more likely than not to remain an Australia resident. Those with longer stays will need to examine their individual circumstances, with the ruling noting that the critical question is whether a person has in fact abandoned Australian residency and commenced to live in a permanent way overseas.
Treatment of Working Holidaymakers and DTAs
In terms of the decision in Addy v Commissioner of Taxation, the ruling now specifically states that working holidaymakers will not usually be considered to be a resident of Australia under any of the residency tests, particularly where they enter and remain in Australia on a working holiday visa, or work and holiday visa, and leave at the end of or before that visa expiring.
In relation to the decision in Pike v Commissioner of Taxation, the ATO maintains that double tax agreement tie-breaker tests that apply to allocate income to one or both countries by allocating residency to one country for an income year or part of an income year only affect the allocation of income. Therefore, even if a DTA allocates your residency to another country under the tie-breaker test, an individual will remain a resident of Australia for Australian tax purposes and will be taxed on that basis to the extent it is not inconsistent with the allocation rules in the specific DTA.
Proposed Residency Law Changes Not Included
It is important to note that the ruling does not incorporate the proposed changes to the residency tests announced by the previous Government in the May 2021 Budget, in response to a 2019 Board of Taxation report on modernising individual tax residency rules. The key proposal from the report was a primary bright line physical presence test, meaning if you spent 183 days or more in Australia in the income year you are a resident, and a secondary test based on the individual’s prior year residency status that takes into account further information if the primary bright line test is not met.
Summary
The Australian Taxation Office has released an updated ruling on individual tax residency that consolidates prior guidance and incorporates key court decisions, including Harding v Commissioner of Taxation, Pike v Commissioner of Taxation, and Addy v Commissioner of Taxation. The new ruling clarifies when an individual is considered an Australian resident under the ordinary concepts, domicile, 183-day, and Commonwealth superannuation fund tests.
Speak to one of our accountants if you have any questions about the changes in residency tests for Australia.
