Reform could see tax residency rules simplified
Treasury is proposing to revamp individual tax residency rules with a two-pronged approach and has opened up the changes for consultation.
Under the new regime, the federal government intends to modernise and simplify the rules following a review from the Board of Taxation in 2017 and align Australia with international practice.
Under the board's proposed model, the primary test will be a simple "bright line test" whereby a person who is physically present in Australia for 183 days or more in any financial year will be deemed an Australian tax resident.
Those who may not be physically present in Australia for 183 days or more might still be a tax resident under the secondary test depending on a "combination of physical presence and measurable, objective criteria".
The secondary test also addresses concerns that an individual may manipulate the 183-day test by spending 183 days in Australia across two income years.
Based on 45 days of physical presence and other factors, the new rules indicate that an individual can still have sufficient connection with Australia to be treated as a resident for tax purposes.
Under the new model, individuals would not become a tax resident merely by being physically present in Australia for 45 days. They would need to meet at least two of the four factors of The Factor Test.
These are the right to reside permanently in Australia; have close family ties in Australia; access to Australian accommodation; and Australian economic interests.
Among the issues that need to be ironed out, the consultation asks participants: How many days in an income year should an individual with strong connections to Australia be able to spend in Australia before they are considered a tax resident?
"Do you consider that days spent in Australia under certain circumstances should be disregarded for the purposes of the 45-day count? If so, why should days be excluded in some circumstances and not others. Who would decide?" Treasury asks.
Under the current 183-day test, according to law firm Baker McKenzie, non-residents are considered tax residents of Australia if they are physically present in Australia for more than 183 days during a financial year either continuously or intermittently.
This is unless the tax commissioner is satisfied that their usual abode is outside of Australia and the individual does not intend to take up residence in Australia.
An individual may also be a resident of Australia if they contribute to a superannuation fund for certain government officers, Baker McKenzie said.
Treasury concludes consultation on September 22.
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