Australian tax residency update

The new tax ruling was issued after the significant tax cases of Harding, Pike and Addy (the backpacker” case).

Key Changes and Clarifications

The new tax ruling (TR 2023/1), provides a nuanced update on determining an individual's tax residency status, incorporating insights from notable Federal Court decisions. This updated perspective helps clarify ambiguities in applying tax residency tests. Below are some of the landmark cases that have significantly influenced the ATO's stance:

Harding v Commissioner of Taxation [2019] FCAFC 29

In this case, an Australian citizen had ceased to be a tax resident while working and residing in temporary accommodation in Bahrain despite frequently returning to Australia to visit family. The court validated that for the "permanent place of abode" test, it isn't essential for an individual to reside in a specific type of dwelling overseas to establish a permanent residence. The court emphasised that what matters is whether the nature of one's presence in each country is harmonious with a permanent lifestyle and a discontinuation of Australian residency.

Expanding on this decision, the ATO clarified that regularly relocating within a country might suggest that the individual has not established a permanent residence and may be either travelling or temporarily residing in that nation.

Commissioner of Taxation v Pike [2019] FCA 2185

This case involved a Zimbabwean citizen working and residing in Thailand who maintained family connections in Australia. The individual was considered an Australian tax resident under the "ordinary concepts" test. The ruling establishes that maintaining an overseas job while periodically returning to Australia—to an established family and social circle—often indicates ongoing Australian tax residency.

Commissioner of Taxation v Addy [2019] FCA 1768

This case concerned a UK citizen in Australia on a Working Holiday Visa. The court determined that her inconsistent and fluid stay in Australia resembled an extended vacation more than it did a permanent residence. The ATO interpreted this case to mean that the behavior and connections an individual establishes on a working holiday in Australia are generally insufficient for tax residency under the "ordinary concepts" test. Moreover, such an individual would typically not meet the requirements of the 183-day test, and hence would not be considered a tax resident.

By considering these cases, the ATO has refined its approach to determining an individual’s tax residency status. This facilitates a more focused and nuanced interpretation of what constitutes a tax resident, particularly in cases that don't fit neatly into conventional categories. The ATO now places increased emphasis on the specific intentions, lifestyle patterns, and other individual circumstances that collectively influence tax residency status.

What was not said?

The government’s May 2021 budget announcement about tax residency test was not addressed.  The tax ruling provides some administrative clarity.  So, Australian tax residents living overseas for less than 2 years are unlikely to stop being residents.  Persons staying in Australia for less than 6 months are unlikely to be tax resident. 

What Makes You an Australian Tax Resident?

You're considered a tax resident if you live in Australia permanently or for an extended duration. But three other tests can make you a tax resident:

• The Domicile Test; 
• The 183-Day Test;
• The Commonwealth Superannuation Fund Test.

You're considered an Australian tax resident if you pass any of these tests.

Key Updates

When figuring out if you're a tax resident, the ATO looks at the following factors:

• How long you've been in Australia.
• Why you're here.
• Your actions while in Australia.
• Your family, work, or business connections.
• Where your belongings are.
• Your social life.

Takeaway

The rules about being an Australian tax resident haven’t fundamentally changed but the focus and clarity about tax residency have moved.  Tax residency is still a high-risk concern for globally mobile families and owners and the topic needs constant monitoring.